Fixed income exchange traded funds have become increasingly popular with advisors and investors. Today, the world’s bond ETFs have nearly $500 billion in assets under management and the number for U.S. fixed income ETFs could continue growing as the Federal Reserve dithers on when to raise interest rates.
Fixed income exchange traded funds have been in the spotlight recently as market participants weigh what the outcome of this week’s Federal Reserve meeting will be. The group of must bond ETFs includes the widely followed iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT).
Long-term Treasuries have strengthened and yields dipped on the continued decline in oil prices helped push down inflationary pressures. Meanwhile, short-term Treasury yields have been anchored as speculators bet on a slow interest rate hike from the Federal Reserve.
European investors are betting that U.S. bonds have more or less priced in a Fed interest rate hike, so any further strength in the U.S. dollar relative to the euro could compensate them if the U.S. bonds dip on a tighter Fed monetary policy – a stronger greenback would add to USD-denominated Treasury bond yields when converted into the weaker euro for European investors. [Demise of Treasury ETFs Over-exaggerated]
The good news for buyers of longer-dated U.S. government bond funds is that some market observers believe it is increasingly unlikely that the Fed boost rates in March.