By Christine Idzelis
‘Demand for credit is still quite strong,’ says Vanguard’s Chris Alwine
Investment-grade corporate bonds rose Tuesday as the stock market sold off.
Investors are hungrier than ever for bonds in the exchange-traded-fund industry amid worries over stretched valuations in the U.S. stock market – and as investors position around an unusual setup in which the Federal Reserve is cutting interest rates amid an expanding economy.
Bond ETFs listed in the U.S. attracted a record $51 billion in October, with their nearly $350 billion of inflows so far this year reflecting an organic growth rate that far outpaces that of equities, according to State Street Investment Management. Investors are showing a willingness to take credit risk in corporate bonds in order to pick up extra yield in their fixed-income portfolios.
“Demand for credit is still quite strong,” even as corporate bond spreads – or the premium investors are paid over comparable Treasurys – have narrowed to historically tight levels, said Chris Alwine, global head of credit at Vanguard, in a phone interview. Bonds have proven to be a diversifier in investment portfolios, said Alwine, adding that Vanguard is “overweight” on credit.
The U.S. bond market broadly rose Tuesday as the U.S. stock market sold off. In being overweight on credit, Alwine said Vanguard is favoring higher-quality corporate bonds and preferring less exposure to high-yield debt, which is rated below investment grade.
The Vanguard Total Corporate Bond ETF VTC, which tracks an index of investment-grade bonds in the U.S., ended 0.2% higher Tuesday, according to FactSet data. The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, which also provides broad exposure to investment-grade corporate bonds in the U.S., closed with a gain of 0.1%.
Investment-grade corporate bonds are beating the broader U.S. bond market in 2025.
The iShares iBoxx $ Investment Grade Corporate Bond ETF has seen a total return so far this year of around 7.6%, exceeding the 6.7% total return for the Vanguard Total Bond Market ETF BND, whose broader exposure to the U.S. investment-grade bond market includes Treasurys, according to FactSet data through Tuesday.
Inflows into bond ETFs this year represent 32% of all flows into the U.S.-listed exchange-traded funds in 2025 – beyond their 17% share of overall industry assets, according to State Street.
Year to date, bond ETFs have “taken in nearly 20% of their start-of-year assets-an organic growth rate that is well above that of equities,” said Matthew Bartolini, global head of research strategists at State Street Investment Management, in a note tracking October ETF flows. While equities have dominated ETF flows this year, Bartolini pegged the category’s organic growth rate at just 8%.
The U.S. stock market closed lower Tuesday amid concern the bull market for U.S. stocks is increasingly tied to the fate of the generative-artificial-intelligence boom. The S&P 500 SPX fell a sharp 1.2% while the Dow Jones Industrial Average DJIA shed 0.5% and the technology-heavy Nasdaq Composite COMP dropped 2%.
ETFs that invest in credit added more than $9 billion in October, with investment-grade bonds attracting much larger inflows than riskier high-yield corporate debt, according to State Street.
Part of the appeal of taking risk in corporate credit is that the Fed is cutting rates against the backdrop of economic growth in the U.S. and as “we have a very good earnings season” so far for third-quarter results, said Alwine. “Typically when the Fed is cutting, the economy is weak.”
But with the economy continuing to grow and publicly traded corporate debt generally appearing healthy, spreads are “justifiably” tight for now, according to Alwine. Under his base case, the U.S. economy expands this year around “trend,” which is 2%, while the Fed remains generally supportive of the economy by continuing to recalibrate monetary policy with potential rate cuts.
Should the Fed continue its rate-cutting cycle, Alwine expects some investors will move out of cash to earn more income from bonds, including by taking more duration risk in Treasurys.
He said that he has observed demand for intermediate-term Treasurys, or maturities in the range of seven to 10 years, and expects that to continue. But Alwine anticipates some investors may seek shorter durations as they step out of cash.
ETF flows in October suggested a hesitancy on the part of investors to move too far out of the Treasury market’s yield curve into long-term U.S. government debt of 10 years or more. The money investors added to “short- and intermediate-term government bond ETFs indicates that investors are eschewing longer-term tenors in favor of the belly of the curve,” wrote Bartolini.
Long-term government debt may be more volatile on a relative basis, “with investors demanding a premium” to buy such securities on fears over rising deficits and the risk of inflation picking up, he said.
-Christine Idzelis
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11-04-25 1630ET
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