Investors betting on peak rates buy up bond ETFs: report

As bond yields spiked last month, ETF investors bought up fixed-income funds and added duration, betting on a peak in interest rates, the latest ETF report from National Bank Financial says.

Almost $1.3 billion went into Canadian aggregate bond ETFs in October, accounting for nearly half of the $2.8 billion in total inflows recorded for the month.

Fixed-income ETFs have dominated all year, accounting for almost $19 billion of the $29.6 billion in year-to-date inflows, according to National Bank.

But, while cash alternative and short-term bond ETFs were the drivers for most of the year, that changed last month, and “investors have increasingly allocated toward long-duration exposure to bet on rates retrenching from a peak,” the report said.

The $6.3-billion iShares Core Canadian Universe Bond Index ETF was the main beneficiary, attracting $860 million in October, according to National Bank. Long-term bond ETFs also brought in $598 million.

Bond yields surged last month, prolonging a rout dating back to 2022 when central banks began their aggressive tightening to combat inflation. As the narrative around higher-for-longer interest rates took hold, the yield on 10-year U.S. Treasuries briefly crossed the 5% threshold for the first time since 2007.

“Since then, yields across the board in both Canada and the U.S. have fallen on the back of lacklustre economic data and indications from central banks that the aggressive rate hike cycle might be approaching its end,” National Bank said.

Money market and high interest savings account (HISA) ETFs brought in $462 million in October. The funds remained popular despite the regulatory uncertainty, which came to an end on Oct. 31 with the Office of the Superintendent of Financial Institutions announcing new liquidity requirements for HISA funds.

As of Jan. 31, banks will have to classify deposits from HISA ETFs as unsecured wholesale funding with 100% run-off, which may affect the yields offered on the popular products.

On the equity side, cap-weighted ETFs were the most popular funds in October, accounting for $730 million. The total flowing into equity ETFs in October was only $691 million, as thematic funds and some factor ETFs recorded outflows.

Crypto ETFs rebounded with inflows of $248 million amid speculation that the U.S. Securities and Exchange Commission was going to approve spot bitcoin ETFs, a regulatory change that didn’t materialize.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.