After a dismal 2022 for fixed income funds, bonds are steadily regaining steam in the new year thanks in part to an inverted yield curve.
Approximately $200 billion flowed into bond exchange-traded funds last year, but the funds have amassed roughly $26 billion in inflows in January alone.
"There's now income within the fixed income ETFs that are available," Todd Rosenbluth, head of research at VettaFi, told Mike Santoli on CNBC's "ETF Edge" on Monday. "We've seen higher-quality investment-grade corporate bond ETFs. We've seen high-yield fixed income ETFs see inflows this year, as well as some of the safer products."
On Wednesday, the 10-year Treasury yield was trading at 3.759%, while the yield on the 2-year Treasury rose to 4.644%. And the yield on the 6-month Treasury hit 5.022%, its highest level since July 2007.
With yields at their highest in decades and soaring valuations in the equity market, quality-seeking investors are hunting for pockets of strength as they await whether a soft landing is in the cards this year.
"We have to take a look at all the macro factors and look at what's driving bond yields and credit spreads right now," James McNerny, portfolio manager at J.P. Morgan Asset Management, said Monday in the same segment.
"We think that there is a high enough likelihood priced into credit spreads in the front end of the curve right now that there is a harder landing potentially to come," he added.
Given the inverted shape of the yield curve, JPMorgan Ultra-Short Income ETF (JPST) offers a portfolio comprised of short-term, investment-grade bonds. According to JPMorgan, the fund is the largest actively managed ETF in the industry, growing to $24.2 billion in the past 5½ years.
McNerny suggested that, with valuations in the red, spreads are too tight to compensate for the possibility of a harder landing.
"When we break down the flows that we're seeing," McNerny said, "we're seeing flows into higher-quality, longer-duration products, and credit products on the front end of the curve. Those have been the lion's share of the majority of the flows that we've seen."
According to VettaFi, many investors are opting for active management with fixed income. Active funds made up 15% of ETF flows in 2022, but have already pulled in more than 20% of the flows since the start of the year.
Jerome Schneider, managing director at Pimco, said that fixed income funds are gaining popularity because they offer investors attractive yields in an uncertain economic environment.
"It's really too early to declare and wave a victory flag with regard to the soft landing," Schneider said in the same segment on Monday. "There's admittedly some issues that are going to be continuing to be evolving in terms of the inflation outlook."
Schneider explained that the Federal Open Market Committee policy to tighten financial conditions is working as inflation steadily declined, but it remains a work in progress.
"For investors right now," he continued, "we have to really be looking at how to think about sectors and allocation in terms of portfolios. And insulating those portfolios to the outlooks, which may not necessarily be 100% convinced that the soft landing is here at hand."
Inflation data released Tuesday revealed that consumer prices rose 0.5% in January and 6.4% over the past 12 months. Both results were higher than some economists' expectations, which had predicted 0.4% for the month and 6.2% year over year.
"More holistically, what investors really need to be doing is pivoting and putting portfolios in that position for maintaining some optionality," Schneider said.
He advised that means seeking higher liquidity while balancing the Fed's tactic for fighting inflation long term. More importantly, he said, for the evolving evolutionary process that we see with regard to earnings and corporate earnings specifically.
"That's going to remove some clouds as we get further along into the year," Schneider said.
