The stock market may be roaring, but 2024 has been Wall Street’s year of the bond fund.
The stock market may be roaring, but 2024 has been Wall Street’s year of the bond fund.
Bonds are paying the highest yields in a generation and interest rates are poised to come down. Meanwhile, a record number of retirees are looking to cut risk in their portfolios. That combination has investors pouring money into both indexed and actively managed funds. Wall Street is seeing dollar signs.
Bonds are paying the highest yields in a generation and interest rates are poised to come down. Meanwhile, a record number of retirees are looking to cut risk in their portfolios. That combination has investors pouring money into both indexed and actively managed funds. Wall Street is seeing dollar signs.
U.S.-listed fixed-income exchange-traded funds have taken in nearly $150 billion through late July, a record through this point in a year. When looking at mutual funds and ETFs together, taxable bond funds were responsible for nearly 90% of net U.S. fund inflows in the first half, according to Morningstar.
After more than a decade of paltry bond yields, and just two years removed from the worst year for bonds on record, the combination of high rates and falling inflation offers investors a rare opportunity for investment income. Rick Rieder, who oversees more than $2 trillion as BlackRock’s chief investment officer for fixed income, is calling the current period “the golden age of fixed income.”
A crucial factor shifting bond prices is investors’ expectations for short-term interest rates. When the Federal Reserve began to cut rates in 2022, investors flocked to cash-like investments. Now, as Wall Street bets that rate cuts later this year are all but certain, investors are looking toward bonds instead, grabbing for yields that have already started to descend as bond prices rise.
“We’re seeing people move out of cash and into bonds,” Rieder said. “Cash has been flipping a lot of yield, but now there’s a sense that the Fed is going to start lowering rates and that opportunity won’t be there anymore.”
Bond funds have been a bright spot for a money-management industry that has struggled to contend with the growth of passive investing and a steep fall in management fees. While investors have largely begun to shun actively managed stock funds, bond pickers are thriving.
Of nearly 1,700 actively managed bond funds tracked by Morningstar, 74% beat their benchmark indexes during the past year. Active bond ETFs are already at an annual inflow record with five months to go. And money managers are trying to cash in with a host of new active fund offerings. Average ETF fees—long on the decline—actually rose in 2023, according to Morningstar, because so many active funds with higher fees were launched.
Investors big and small are buying a variety of fund categories, some riskier than others. Index-tracking Treasury ETFs have become a favorite tool for Wall Street traders to make interest-rate bets. Investors betting that rate cuts will soon boost bond prices plowed $6 billion into long-term Treasury ETFs in June alone, representing 7% of their assets at the start of the month.
Actively managed funds investing in junk-rated corporate debt with high yields have also raked in money. The most popular active fixed-income ETF this year, Janus Henderson’s AAA CLO ETF, invests in collateralized loan obligations—securities made of bundles of low-rated corporate loans.
Many investors are also simply buying plain-vanilla funds focused on total returns from the highest-rated debt, welcoming the fact that even the safest returns finally feel meaningful.
Todd McConachie, a 62-year-old retired corporate-risk analyst in Portland, Ore., said he has moved a substantial portion of his stock-heavy retirement portfolio into bond funds over the past year-and-a-half.
He now owns funds that buy highly rated corporate bonds and higher-yielding junk bonds, along with U.S. Treasurys bought directly through the government’s TreasuryDirect platform.
“When rates were so low, I held some total-bond-market index funds and didn’t pay much attention, happy to clip coupons and get 3%,” McConachie said. “Now it’s like, ‘Whoa, some of these funds are 7.5% payouts and I can double my cash flow from interest payments.’ “
All the enthusiasm marks quite the reversal from 2022. Rising interest rates crushed bond funds, sending the Bloomberg U.S. Aggregate bond index down a record 13%. Stocks fell, too, stinging investors who had expected bonds to cushion their portfolio during market turbulence. The classic 60% stocks, 40% bonds portfolio had its worst year since the Great Depression.
Wall Street thinks that is all done with, and analysts argue that now is the time to get back in before benchmark rates come down again, and with them the payouts on bonds. Derivatives traders are now pricing in a roughly 100% chance the Fed will cut rates in September, and the benchmark 10-year Treasury yield has dropped more than three-quarters of a percentage point since peaking around 5% in October.
“The interest this year has been quite broad-based,” said Matthew Bartolini, head of Americas research for State Street’s ETF business. “Flows have been so large and to so many different products. They’re coming from institutions, wealth managers and retail traders.”
Another simple explanation for this year’s big bond-fund numbers: the bull market that has generated windfall gains in people’s stock portfolios, pushing investors to shift some money into bonds to balance out their risks.
“Just because the stock market has been beating up on bonds for so long, people are needing to buy more bond funds when they go to rebalance,” said Ryan Jackson, senior manager research analyst at Morningstar.
Write to Jack Pitcher at jack.pitcher@wsj.com