Investors showed a strong appetite for higher yielding bonds in June, driven by uncertainty surrounding Federal Reserve policies, data from State Street reveals. Fixed-income exchange-traded funds attracted nearly $25 billion in flows last month, with a significant portion going towards long-term government bonds and credit-risk assets like bank loans and collateralized loan obligations (CLOs). Despite the inherent risks associated with these investments, investors seeking limited rate volatility have been flocking to these opportunities, with 13 consecutive months of inflows totaling over $18 billion.
Bank loans and CLOs are particularly attractive in the current high interest rate environment, providing floating coupon rates that can yield high returns for institutional investors. These assets offer protection in the event of default, with lender priority ensuring repayment. While these investments may see a decline in income once the Fed adjusts its policy, they are considered less price-sensitive to rate changes compared to longer-dated fixed income assets. Investors can access this space through ETFs like the BlackRock Floating Rate Loan ETF (BRLN) and the Janus Henderson AAA CLO ETF (JAAA), which have proven popular choices with attractive yields and manageable expense ratios.
Amid a robust economy and positive earnings growth, investors are balancing the pursuit of yield with the need to manage rate volatility in their portfolios. While bank loans and CLOs offer a shield against rate sensitivity, the evolving nature of Fed policy adds an element of uncertainty to fixed income investments. As investors navigate these risks and opportunities, the hunt for yield continues to shape investment strategies in a market environment marked by changing monetary policies.
