Investors are jumping into bonds to start 2023, and these fixed income ETFs are hot

Published Wed, Jan 18 202310:59 AM ESTUpdated Wed, Jan 18 20231:43 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

Investors are loading up on bonds in the opening days of 2023, seeking not just the safety of income but also solid returns created by the Federal Reserve's large rate hikes. The yield on the benchmark 10-year U.S. Treasury has gone from nearly 3.9% at the end of December to below 3.5% on Wednesday. Yields move opposite price, so the swing reflects strong bidding for Treasurys. The renewed interest in fixed income comes after 2022 proved to be one of the worst years on record for fixed-income investing, leading some to wonder whether the traditional portfolio of 60% stocks and 40% bonds may have outlived its usefulness. But with rates now at their highest levels in more than a decade, investors are taking advantage of newfound yield available in credit markets. "The role of bonds in a portfolio is increasingly relevant for the first time in years," BlackRock CEO Larry Fink said in an earnings call Friday. "Investors can actually earn very attractive yields without taking much duration or credit risk. Just a year ago, the U.S. two-year Treasury note was yielding approximately 90 basis points, and today they're earning over 4%, with corporate bonds earning over 5% and high-yield earning 8%," he said. Surging interest in bonds is evident in fixed-income ETFs, where cash has been pouring in during the first two weeks of the year. "Through the first 9 trading days of the year, the category is averaging $2 Bn inflows per day (a 5-year daily average is $618 Mm/day). A 40-day sum of +$48 Bn marks one of the higher readings historically —consistent with the Covid Fed buying facility — and partially a consequence of the enormous outflows from mutual fund products," Strategas ETF strategist Todd Sohn said in a note to clients Tuesday. The torrid start to the year for bond ETFs is an acceleration from 2022, when the group started to catch up to the larger equity ETF market. Last year, a record of $266 billion of cash flowed into fixed-income ETFs, according to BlackRock. The company's iShares arm took in nearly half of that total. A list of the most popular funds so far shows that the trend is not necessarily a run to safety, either. According to FactSet, the fund with the most inflows so far is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) , a junk bond instrument. The iShares JP Morgan USD Emerging Markets bond ETF (EMB) also makes the top 10. That growing risk appetite mirrors some activity in the equity market, where the tech-heavy Nasdaq Composite is outperforming the S & P 500 in 2023. For investors who are more cautious about the macroeconomic picture, there could still be solid returns in safer corners of the bond market. DoubleLine Capital CEO Jeffrey Gundlach said Jan. 10 that investors should consider flipping the traditional 60/40 portfolio, overweighting fixed income rather than stocks. He said he favors long-dated U.S. Treasurys , which would rise sharply in price in the event of a U.S. recession. Another notable fund early in 2023 is the First Trust Limited Duration Investment Grade Fund (FSIG) , which has pulled in more than $260 million of new money so far this year — accounting for more than two-thirds of its assets under management. The actively managed fund has delivered a total return of about 3.3% over the past three months.