Fixed-income assets and bond-related exchange traded funds have become the go-to investments for conservative investors seeking stable returns. However, with yields pushed down across the globe, fixed-income investments are highly susceptible to bouts of volatility.
“The risk in bonds has gone up,” Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs Group, said on Bloomberg. “The sensitivity to small changes in yield expectations from here will command very sizable price swings, and I just think that makes fixed-income a very dangerous asset class.”
For instance, after benchmark 10-year Treasury yields jumped from their 1.65% low at the end of January to its current 2.016% level, bond ETFs have shown a considerable dip. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.64 year duration, fell 2.9% since the end of January. The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 6.31 year duration, dropped 1.6%; since its recent high. Additionally, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), which has a 8.14 year duration, declined 1.8% since yields began to fall.
According to the Bank of America Merrill Lynch’s Option Volatility Estimate MOVE Index, expected Treasury price swings are about 40% higher this year than in the same period in 2014.
Big banks have cut back on risky, speculative-grade debt to meet new regulatory requirements. However, UBS analysts have shown concern over the concentration of fixed-income assets with lower credit qualities among large institutions, insurance companies and mutual funds, which have raised their holdings of corporate and foreign debt to $5.1 trillion, a 65% jump since the end of 2008. [Bond ETFs Extend Record Inflows]