Joanna Gallegos, co-founder of the fixed-income ETF company BondBloxx, emphasizes that the focus for investors is currently on currency and performance chasing, rather than a decline in confidence in the U.S. market. According to Gallegos, the pressure on the U.S. dollar is encouraging investors to consider assets outside the U.S. She notes that many are looking at last year's returns and seeking similar opportunities internationally.
Despite concerns over the fiscal health of the U.S. amidst high spending and deficits, along with President Trump's foreign policy impact, there is increasing interest in diversifying investments internationally. Recent performance metrics show a rise in interest, notably in emerging market bonds, which have been top performers in the fixed-income space year-to-date and last year as well.
Data from Morningstar for January shows that U.S. investors are not abandoning domestic markets. In fact, U.S. market ETFs experienced an estimated $156 billion in net inflows in January, marking the best January on record. Simultaneously, international equity ETFs also saw a record month, gathering $51 billion in net inflows. Taxable bond ETFs followed suit, gaining $46 billion in net inflows, with the Vanguard Total Bond Market ETF and the Vanguard Intermediate-Term Corporate Bond ETF leading the way.
Despite the specter of a private credit bubble, Gallegos maintains that the U.S. offers a robust fixed-income market and substantial global investment opportunities. Investors are broadening their portfolio horizons without relinquishing their focus on U.S. assets. Gallegos points to strong corporate earnings and balance sheets as indicators of a resilient U.S. economy. Specifically, she highlights the bond market's improving yield curve, noting that long-term rates are appropriately higher than short-term rates.
Todd Sohn, technical strategist at Strategas Securities, notes on 'ETF Edge' that the fixed-income portion of portfolios may soon experience a shift as impactful as the changes seen in equity assets. He highlights the notable role of money market funds over recent years, which have held substantial capital while generating safe returns. With central bank rates poised to move lower, Sohn predicts that more capital will shift to credit markets and bonds.
Gallegos emphasizes that investors no longer need to seek distant yields, particularly highlighting opportunities in investment-grade credit where yields remain attractive. She encourages investors to look towards 'BBB' rates, which offer higher yields with historically low default risk. Concluding, she notes that bonds have evolved beyond their traditional defensive role, now providing income and growth opportunities for portfolios.
Source: VettaFi