Rice interest is about to drop! Who will beat the Chaos Market? Is now the time to aim for a “golden age” bond ETF
In just 2 weeks, the strong rebound in the US stock market made up for the sharp decline at the beginning of August, and the market has begun to become “extremely optimistic” about the future of US stocks. However, although the turmoil has subsided, many selling factors have not disappeared, such as the US presidential election, sluggish economic data, substantial financial tightening, overvaluation of the stock market, and geopolitical risks, etc., and the market should still be wary of potential future volatility.
Under these circumstances,Combines the benefits of lower US interest rates with defensive characteristicsStocks have shown steady movements and are beginning to attract attention. That is, the price was temporarily high during the market crash on 8/5, and profit margins from July onwards were also strongUS stock market bond ETFthat's it. Compared to bonds, bond-linked ETFs are not affected by maturity, are highly flexible, and have the advantage of diversified investment. Supported by strong demand,Further rise is expected。
Matt Montemuro of BMO Global Asset Management (GAM) says that due to the combination of the mitigation cycle and uncertain market volatility, many investors who have stayed away from fixed interest products until now will return again.
Meanwhile, according to BlackRock, the global bond ETF fund inflow in July was 60.5 billion dollarsRecord highI did it. State Street Global Advisors, the third-largest ETF issuer in the US, also recorded a capital inflow of 41 billion dollars in its US equity bond ETF in the first half of this year, and thisIt has already surpassed the record for the full year of 2023and explanation.
● The approaching reduction in US interest rates is a strong tailwind
Interest in bonds has been rekindled in the market due to changes in the interest rate environment. US bond prices are rising due to heightened expectations of interest rate cutsWhether or not the US faces a recession,The Fed's policy adjustments are a tailwind for the bond marketIt becomes. The current high interest rate environment makes it possible for investors to determine profits in advance, but despite the fact that supply and demand dynamics affect short-term prices in the long run, Fed policy predictions lead the direction of long-term yields. Additionally, bond yields have returned to the level they were ten years ago, and bonds are once again an attractive asset class. BlackRock's Rick Reader said that since investors seek higher yields in anticipation of lower interest rates,Now that there is a shift from cash to bonds「The golden age of bondsIt's called”.
In an environment of declining interest rates, real interest rates fall, and yields on cash deposits continue to decline. “The number of people shifting from cash to bonds is increasing. Cash has raised a lot of yield, but now the Fed has begun to cut interest rates, and there is a widespread view that there will be no more opportunity for that,” the leader said.
The returns of major bond asset classes after the start of the last eight Fed mitigation cyclesIt is as follows.
● Bonds have become the most loved hedge asset in the market
According to traditional inverse correlation, the correlation between stocks and bonds is negative, but due to aggressive interest rate increases that began in 2022/3, both the stock market and the bond market crashed, completely overturning the traditional inverse correlation between the two. However,Bonds and stocks have been moving in opposite directions over the past month, and there is a possibility that they will return to the trend before 2022There is.
On August 5, the S&P 500 fell 3%, causing a major market crash. The Volatility Index (VIX) surged from 23 to over 60, and recorded the third-highest level after the pandemic and the 2008 financial crisis. Amidst such turmoil, bond ETFs showed solidity, and ETFs focusing on US bonds and US comprehensive bonds attracted particular attention. Amid a general decline in bond yields, these ETFs showed strong performance with significant capital inflows.
When stock prices fall in line with valuation revisions, investors need to protect their capital from falling value”safe havenThere is a tendency to seek”.
● Strong demand! Countries around the world will drastically increase their holdings of US bonds
When it comes to US bonds,Increased holdings from countries around the world continue to be a major trend. According to the latest international capital transfers (TIC) announced by the US Treasury Department, US bonds held by China in June increased by 11.9 billion dollars compared to May,The biggest monthly increase since December last yearIt was recorded. In addition, France, the United Kingdom, and Canada also bought more US bonds on a large scale in June. TIC also further expanded the size of US bonds held by overseas investors, and it is 8.21 trillion dollarsRecord a new historic highIt shows what they did.
The background to this isThe rise in gold prices is also related. Analysts believe that many central banks around the world strengthened their foreign exchange reserves and prioritized holding gold for risk hedging. However,The cost of gold investment has increased rapidly due to the current rise in gold pricesAs a result, some central banks are once again turning their attention to US bonds. In fact,From the viewpoint of asset safety, risk avoidance, and liquidity, there is a high degree of similarity and substitution effect between US bonds and gold。
● Bonds more stable than stocks under economic deceleration
Amid economic deceleration, bond prices are more stable than stocksAlso, there is a tendency to work positively. The US economy may remain strong enough to support stock price increases in 2024, but compared to 2023Significant adjustment risks have at least increasedDoing it.
●High yields and stable dividends strike back
There is a possibility that bond yields will continue to decline in the latter half of 2024, but they are still at a high level not seen in the past 16 years. Bond ETFs usually pay interest or coupons to investors according to the yield of the bond. For this reason,Bond ETFs are an attractive option, especially for investors who prefer monthly dividends and interest paymentsIt becomes. This is because interest payments on most single-issue bonds are semi-annual or yearly.
In the US bond ETF market,Government bond ETF、Comprehensive bond market ETF、Corporate bond ETFIt accounts for the largest ratio (the sum of the 3 types accounts for about 80% of the market size).
●Government bond ETF
Bonds have short-term maturities (less than 1 year), medium-term (1-10 years), and long-term (10 years or more).The longer the period, the easier it is to be affected by interest rates. In general,Short-term bonds are the most stable, and although long-term bonds are expected to have high returns, they also fluctuate greatly. Interest rate cuts are advantageous to the price of long-term bonds, so even among bonds of different periods, $iShares 20+ Year Treasury Bond ETF (TLT.US)$IsIt has been showing the best performance recently。
Other US Treasury ETFs: $Ishares Trust 10-20 Year Treasury Bd Etf (TLH.US)$、 $iShares 7-10 Year Treasury Bond ETF (IEF.US)$、 $iShares 3-7 Year Treasury Bond ETF (IEI.US)$、 $iShares 1-3 Year Treasury Bond ETF (SHY.US)$、 $Ishares Trust Ishares 0-3 Month Treasury Bond Etf (SGOV.US)$、 $Schwab Strategic Tr Short-Term Us Treasury Etf (SCHO.US)$、 $SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL.US)$、 $Vanguard Long-Term Treasury ETF (VGLT.US)$、 $Short-Treasury Bond Ishares (SHV.US)$etc.
●Comprehensive bond market ETF
Investors who want to invest in the entire bond market without being limited to a specific categoryis $Vanguard Total Bond Market ETF (BND.US)$Ya $iShares Core US Aggregate Bond ETF (AGG.US)$etc.,It has the largest asset size and is suitable for long-term investmentsComprehensive bond market ETFYou can choose. Furthermore,Investors who want global diversificationFor $Vanguard Total International Bond ETF (BNDX.US)$is the biggest fund choice.
According to FactSet data, July will be linked to a broad index of US investment grade bonds $iShares Core US Aggregate Bond ETF (AGG.US)$isRecord the biggest monthly increase this yearI did it. As ETF stock prices rose, the fund recorded a total return of 2.4% last month,The biggest monthly total return since December last yearIt became.
●Corporate bond ETF
$Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$is an investment grade corporate bond ETF linked to the performance of the iBoxx US Dollar Investment Grade Corporate Bond Index. This ETFHolds corporate bonds from many large, highly reputable companiesAnd since these companies usually have healthy financial conditions and high credit ratings,Investors can obtain relatively stable investment instruments with higher yields than government bonds。
Sources: Bloomberg, Yahoo Finance, Seeking Alpha, Moomoo, MarketWatch
This article uses automatic translation for some of its parts
ー MooMoo News Sherry
This article uses automatic translation for some of its parts
ー MooMoo News Sherry
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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