VettaFi’s vice chairman Tom Lydon joined CNBC’s “ETF Edge” and host Bob Pisani on Monday along with recently appointed MarketAxess CEO Chris Concannon and F/M Investments president and CIO Alex Morris to talk fixed income and Treasury ETF flows. Speaking on a range of topics in the space, the trio spoke to overall ETF flows, Treasuries, the 60/40 portfolio, and more.
Treasury bonds and Treasury ETFs have seen “oceans” of money coming in, according to Pisani, asking the trio of Lydon, Concannon, and Morris to discuss how the fixed income market will handle those inflows.
Morris spoke to the challenges of buying Treasuries directly from Treasurydirect.gov and the benefits of Treasury ETFs and their maneuverability in the space. Turning to Lydon, Pisani brought up the gap between $3 billion in outflows from U.S. equities for the prior quarter and $45 billion for Treasury ETFs, which Lydon underlined as part of a broader moment in fixed income.
“The great thing, Bob, as you point out, you’re finally getting paid for being invested in fixed income,” Lydon said, explaining that the available yields in the six-month and the 10-year Treasuries may turn investors away from taking risk elsewhere, especially with the Fed’s fight against inflation creating a tenuous, risk-off period.
All that said, those flows for Treasury ETFs have come as overall ETF flows have dipped, totaling just $77 billion in the first quarter, Pisani noted, compared to more than $200 billion in the first quarter last year. For Lydon, that may be attributable to money market fund usage and advisors possibly having pulled out of the 60/40 in the last year.
“There’s a lot in money market funds. And also in the last year, we’ve seen a lot of advisors take a little bit off the table, both in the equity side and the fixed income side. We talked about the problems with the 60/40,” Lydon said.
“People might be buying individual issues in the bond market,” Lydon added. “They may be going to money market funds and, for the first time in years, actually getting paid to be there. So safety is key, until we start to see confidence that the Fed really has some handle on inflation and stability in the marketplace. We’re really in a tenuous time right now.”
Despite those fluctuations, ETFs have helped the fixed income space, Lydon explained, improving fixed income liquidity and price discovery, with investors, advisors, and institutions using fixed income and Treasury ETFs with confidence, thanks in part to those attributes.
Citing VettaFi’s advisor engagement data, Lydon also pointed out that those advisors who had stuck with the 60/40 portfolio may have struggled initially but are feeling a bit more confident, while those who stepped out of the 60/40 may be getting back in.
“They’re starting to move back in not just into Treasuries, but into corporates and high yields with the idea that we may be able to lock in longer duration, and longer payment for those higher rates, with the idea that we’re not going to see higher rates a year from now,” Lydon concluded.
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