Bonds Bottoming? The Upside for Investors

Source: NYSE

The steady outflow of bond funds this year slowed down in May, thanks in part to higher yields and lower bond prices.

As the Federal Reserve is growing increasingly hawkish on the economic outlook, bond yields have risen to the benefit of investors. Jerome Schneider, head of short-term portfolio management and funding at Pimco, explained that the playing field has fundamentally changed this year. 

Since yields move inversely to prices, bonds which might not have been a source of return for investors in the past are now exhibiting yields that are incentivizing investors to carry bonds or include them as a defensive posture in their portfolios, he said.

"The path of least resistance was one of risk assets last year, now it's one of de-risking and volatility management," Schneider said in an interview with CNBC's Bob Pisani on "ETF Edge" on Monday.

The yield on the benchmark 10-year Treasury note surpassed its highest level in almost a month on Monday, going above 3% before retreating Tuesday. Regardless of the day-to-day surges and retreats, Dan Wiener, editor of The Independent Adviser for Vanguard Investors and chair of Adviser Investments, explained that bonds are acting like "shock absorbers" and brushing off the catalysts that are driving down markets.

"I wouldn't call it a plateau, but it's a whole new plan. And investors are benefiting big time by this because they are earning twice as much yield today than they did at the beginning of the year," Wiener said in the same interview Monday.  

Bond funds have seen $242 billion in outflows this year. In May, mutual funds logged $90 billion in outflows alone. But bond ETFs posted $34 billion of inflows during the same period.

Todd Rosenbluth, head of research at VettaFi, explained that the trend means that more advisors are embracing the exchange-traded fund structure.

"Younger investors are more comfortable with the ETF structure than they are mutual funds. You're getting some of the benefits of liquidity and tax efficiency through ETFs," Rosenbluth said in the same interview.

Investors will be watching for a key inflation gauge to be released Friday morning. The consumer price index is expected to show signs of easing in its "core" reading for May, giving rise to speculation inflation has already hit its peak.

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