Diverging monetary policies are driving some foreign investors to search for yields in U.S. markets, potentially bolstering U.S. bond-related ETFs.
According to BlackRock, while the U.S. Federal Reserve hikes interest rates and Asian central banks have chosen to stand pat, investors have driven up demand for fixed-income ETFs, reports Karen Yeung for South China Morning Post.
The Fed is expected to raise rates in each quarter for the rest of the year. Meanwhile, China, Korea and Sinagpore have not shown any signs of tightening rates any time soon – the People’s Bank of China even cut bank reserve requirement ratios last month, signalling its intent to lower commercial banks’ funding costs.
The divergence may be a result of stronger regional economic growth and subdued inflation among Asian economies. Furthermore, analysts argued that currency appreciation last year in Asia was mirrored by a weak U.S. dollar, which helped diminish the need for local rate hikes.
Given the current diverging environment, Asian investors are exhibiting increased demand for attractive yield generating assets, which could help bolster fixed-income ETFs.
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For instance, back in 2015, Japanese investors turned to international fixed-income ETFs for yields overseas ahead of the Bank of Japan’s decision to diverge its monetary policy from that of the U.S.
“Variable rate differences across countries and durations mean you need a nimble instrument to shift through fixed-income asset classes,” Geir Espeskog, head of BlackRock’s ETF business iShares Asia Pacific distribution, said.
BlackRock pointed to $2.5 billion of inflows from Asian institutional investors into fixed-income ETFs over the first quarter alone, compared to $3.8 billion from the group for the whole of 2017.
“The income component of fixed income products is what larger institutions are looking for when judging the risk-versus-return dynamic,” Chris Pigott, Brown Brothers Harriman (BBH) senior vice-president and head of Hong Kong ETF services, told SCMP. “There is definitely interest here in bringing new fixed income products to the market to tap this demand.”
For more information on the fixed-income market, visit our bond ETFs category.