Bond ETFs Are Worrying Less About Inflation, More About Growth

Fixed income investors are picking up Treasury bond exchange traded funds, reflecting lessening inflation fears but potential growth concerns.

The iShares 7-10 Year Treasury Bond ETF (IEF) was among the most popular ETF plays of the past week, attracting over $1.2 billion in net inflows, according to ETFdb data.

Fueling the anxiety over the growth outlook and the economic recovery, the higher infection rates from the Covid-19 Delta variant have weighed on sentiment and sent equity markets plunging on Monday, which have also helped lift safe-haven government bonds.

“The Delta variant poses a major risk to the outlook,” Chris Williamson, chief business economist at IHS Markit, told the Wall Street Journal. “Not only have rising case numbers led to a slide in business optimism to the lowest since February, further Covid waves around the world could lead to further global supply-chain delays.”

Meanwhile, the shift in the bond markets, with yields on benchmark 10-year Treasury notes falling from a high of 1.749% in March to below 1.2% earlier in the week, showed lessening concerns with respect inflation. Looking at the bond market, the inflation outlook is less worrying than it has been for most of the past decade, Bloomberg reports.

“Our view is growth and inflation moderate,” Michael Collins, senior portfolio manager at PGIM Fixed Income, told CNBC. “I don’t care what growth and inflation looks like this year, what matters to our forecast of the 10-year Treasury is what it’s going to be like over 10 years. And I think it’s going to go back down. That’s the world we live in.”

Consequently, Collins believes that investors may be in for below-trend growth with interest rates well below standard.

“The U.S. is going to continue to be a leader in global growth and economic dynamism,” Collins added. “But 1.5% to 2% is our speed limit on growth unless we have some productivity miracle.”

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