Home Business News Are US bond markets approaching the bottom?

Inflation in the United States may still be far from its targets, and we have heard many repeated warnings from the Federal Reserve about continued inflationary pressures.

This has prompted members of the Federal Open Market Committee to adjust their projections for the final interest rate range this year, which has strengthened prevailing expectations to some extent of higher for longer rates.

Markets expect that there is a possibility that the Federal Reserve will raise interest rates for a final time this year. However, investors in bond markets appear more optimistic, which has led them to pump more investments into this market, which recorded the weakest performance we have not seen since 2007.

When studying the net flows of twenty of the most prominent bond ETFs, whose holdings varied between treasury and municipal bonds and short- and long-term, fixed-rate or inflation-protected bonds, in addition to two international funds, we witnessed net flows of about $6.694 billion during last September, which is the highest level since last March, during which we witnessed net inflows of about $18.375 billion. Moreover, net flows last September recorded the second highest value during the current year.

Treasury bond funds appear to have continued to attract investor interest during last September. It recorded net inflows of more than $3.487 billion. While all six bond ETFs with a maximum maturity of three years did not record negative net inflows, except for the Vanguard Short-Term Treasury ETF (VGSH), which recorded net outflows of about $154 million.

As for bond ETFs with variety of maturities, which usually reflect the performance of the total bond market, they recorded mixed performance. The Vanguard Total Bond Market ETF (BND), which tracks the Bloomberg US Aggregate Float Adjusted Index, recorded net inflows of more than $2 billion. While iShares Core U.S. Funds have registered Aggregate Bond ETF (AGG) and iShares U.S. Treasury Bond ETF (GOVT) had net outflows of approximately $370 million.

While funds with long-term bond holdings, of which there are four, had relatively modest positive flows of about $200 million.

Also, municipal bonds have drawn significant market attention. The iShares National Muni Bond ETF (MUB), one of the most prominent funds focused on municipal bonds, recorded net inflows of more than $2.1 billion during September, the highest level since May of 2022, when we witnessed inflows of about $3.9 billion.

As for inflation-protected bond funds (TIPS), they continued to record poor performance in general. The iShares TIPS Bond ETF (TIP), Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) and iShares 0-5 Year TIPS Bond ETF (STIP) recorded net outflows totaling approximately $955 million. But we saw more inflows into the Schwab U.S. fund TIPS ETF (SCHP). It seems that the markets are not very encouraged to pump investments into inflation-protected bond funds, as inflation continues to decline, albeit slowly.

As for international bond funds, they also witnessed some variation in flows during September. The Vanguard Total International Bond ETF (BNDX) continued to record positive inflows of approximately $290 million. As for the iShares J.P. The Morgan USD Emerging Markets Bond ETF (EMB), which will track emerging bond markets, recorded further outflows with outflows of approximately $251 million.

Market expectations of the end of the Federal Reserve’s interest rate hike seem to have led to more flows into bond funds in general. The markets believe that if the interest rate hike that we witnessed last July is the last, this means that the bond markets have already reached the bottom, which may constitute an opportunity to enjoy holdings of assets that generate a return that we have not seen for more than a decade, with Interest rates have been at their highest levels in more than twenty years.

Also, the continuation of flows into bond markets may put more pressure on competing assets, most notably gold, which has reached the lowest levels that we have not seen since last March, with gold COMEX futures reaching the level of $1,830 per ounce, despite expectations that suggest the end of Federal Reserve interest rate hiking. However, record high bond yields may represent a more attractive opportunity than gold, which does not yield a return.

The positive sentiment in the bond markets also comes with the disappearance of the assumption that the US economy will fall into a recession and that the United States will not be able to pay its obligations, although we still have some expectations that talk about the possibility of it falling into a slight recession at some point in the year 2024.

I believe that bond markets will receive more attention if investors are certain that monetary tightening and interest rate hikes have actually ended, which may lead to more inflows into bond funds, which may be of great interest during the remainder of this year.

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