Watch Live

Tweet TWEET

ETF Appetite for Fixed Income Diminishes on Reduced Money Flows

Exchange-traded funds that buy bonds in the U.S. are losing out to equity ETFs as investors move toward riskier assets, signaling confidence in the strength of the economy.

Investors deposited $251 million into fixed income ETFs yesterday, below the 20-day average of $960 million, according to data compiled by Bloomberg. That compares with $3.9 billion that flowed into stock funds.

Buyers are regaining their appetite for risk after a rout in emerging markets from Argentina to Turkey and a slowdown in U.S. jobs growth in January led to the shift of record amounts out of U.S. stock funds and into fixed income. Last week, bond mutual funds attracted the biggest inflow since May, according to the Investment Company Institute. Demand for safer securities is weakening now as investor confidence revives.

“This year started with a major reversal toward risk aversion,” David Mazza, head of ETF research for the Americas at State Street Global Advisors in Boston, said in a telephone interview. As investors “have assessed the news in emerging markets and have been able to absorb some of the more recent data points coming out of the United States, it has given investors a little bit more confidence in the outlook for equity markets.”

Total assets in the 10-biggest junk-bond ETFs rose to $34.7 billion yesterday, the highest since Jan. 22, according to data compiled by Bloomberg.

Junk ETFs

“We have actually seen more money move into high-yield-based ETFs, which portrays some of the confidence that is coming back into the broader economic outlook,” Mazza said. “Investors are again willing to increase the risk they are willing to take in their portfolios.”

ETFs, which are listed on exchanges and are bought and sold like stocks, typically allow individual investors to speculate on securities without directly owning them.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, increased 0.1 basis point to 64.6 basis points as of 5:20 p.m. in New York, according to prices compiled by Bloomberg. The measure rose from 63.9 basis points on Feb. 24, the lowest level in a week.

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Colgate-Palmolive

Colgate-Palmolive Co. (CL) issued $500 million of 1.75 percent, five-year notes that yield 30 basis points more than similar-maturity Treasuries and $500 million of 3.25 percent, 10-year debt at 65 basis points more than benchmarks, Bloomberg data show.

Proceeds may be used for paying down debt and for general corporate purposes, Bloomberg data show. The consumer-products maker last issued bonds in October, the data show.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, was little changed at 318, Bloomberg prices show. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt held at 99.7, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at jsummers20@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.