Bond ETF flows surge in hunt for yield: 'Market sniffing out something here,' says BlackRock exec
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- U.S. bond ETF flows are up 60% relative to last year, according to Steve Laipply, global co-head of iShares fixed-income ETFs at BlackRock, with significant money going into Treasuries and multi-sector income funds.
- Breakeven inflation rates have fallen 'very, very sharply' at both the short and long ends of the Treasury curve, leading Laipply to conclude the 'market is sniffing out something here.'
- New Fed Chair Kevin Warsh held his first FOMC meeting last week and was 'clear about maintaining the Fed's inflation-fighting credentials,' though his lack of forward guidance is creating an 'uncertainty premium' in bonds, per Allspring's George Bory.
- The front end of the yield curve is now very steep as the market prices in multiple Fed rate hikes, with yields rising materially further out the curve.
- Credit spreads are very tight and 'likely to stick with us,' Bory said, warning against being 'too aggressive' chasing the extra income even as he called this a potential credit 'super-cycle.'
- Labor market concentration complicates the Fed's dual mandate, with Laipply noting roughly 90% of recent job creation has been in healthcare, government services, and leisure, while 'most of the labor market is soft.'
- Core inflation data hit its highest level since October 2023 but came in line with market expectations, reinforcing the case for the Fed to maintain its inflation-fighting stance.
Why it matters: A 60% surge in bond ETF flows signals that fixed income has become genuinely competitive again for income-seeking investors, particularly as Warsh's reduced forward guidance forces duration risk management to become more active. Falling breakeven inflation rates — which BlackRock calls a market tell — could matter for the Fed's rate path if the signal proves correct, and the steepening front end already shows traders positioning for hikes.
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