Global bond ETFs had their best quarter on record with $44.5 billion inflows in Q1 2017, remaining resilient despite a widely anticipated Fed rate hike in March.
The previous record was set in Q1 2016 when the products attracted $42.5 billion in assets.
The asset growth follows news this week that the global exchange traded fund industry as a whole surpassed $4 trillion in April, according to figures from ETFGI, an industry data provider.
BlackRock iShares says it has captured $20.3 billion of fixed income ETF flows, so what is driving the passive fixed income demand? Especially given that bond prices go down when interest rates go up.
Stephen Cohen, head of fixed income beta at BlackRock iShares commenting on the fixed income flows particularly the US investment grade credit flows says, 'Despite a rate hike, US investment grade credit saw strong demand on the back of positive economic data.'
Commenting on the sector BlackRock iShares says investors have an appetite for investment grade credit, emerging market debt and treasury bond funds.
In particular Treasury Inflation Protected Securities (TIPS) ETFs have globally attracted $3.6 billion in flows during the first quarter.
It seems TIPS ETFs have continued the trend from the end of last year, investors continue to use inflation-linked exposures such as TIPS to protect portfolios against potential increases in inflation.
In contrast to BlackRock iShares, in a media conference call Charles Schwab said it has seen fixed income ETFs flows drop -13% in the first quarter of 2017 at $3.1 billion and it is time to be 'fairly cautious' with the bond market.
Kari Droller, managing director of the ETF Platform for Charles Schwab explains the flows weakened in second quarter and fourth quarter last year as the US Federal Reserve raised rates and began to talk about additional future rate increases.
She adds, the yield to date flows are up 29% in the first quarter of 2017 compared to the fourth quarter of 2016.
The exact figure when it came to fixed income flows from Charles Schwab is $3.1 billion in the first quarter of 2017 compared to $3.5 billion in the first quarter of 2016.
Expect two US Fed Rate hikes
Kathy Jones, chief fixed income strategist at Charles Schwab centre for financial research, says she expects the US Federal Reserve to raise rates again - possibly twice this year.
Jones says: 'We think that the US Federal Reserve will try to raise rates two times this year. They have clearly made that their intention and we have had several officials reiterates that in recent speeches that that is their expectation assuming the economy continues to do well.'
Jones highlights another important factor is impacting fixed income ETF flows and further Fed rate hike decision is unemployment figures.
'This is low and continues to fall even though job growth is not particularly strong as compared to a year ago even at 90,000 jobs a month it will drive the unemployment rate down because the labour market is tightening.' says Jones.
If that continues the US Fed will continue on the path to raise rates this year possibly two more times. To sum up Jones says: 'It looks as though we are still in a 2% growth it looks as though 2017 is a 2%.'
Equities have been more popular Q1 2017
Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, highlights in the first quarter of 2017 investors preferred taking on risk with equity ETFs.
However, CFRA thinks the market will become more volatile and investors will find comfort in the relative stability of investment grade corporate and aggregate bonds.
Rosenbluth says: 'Even if the Fed raises rates further, we believe the lower-cost products will be viewed favourably as returns are more modest.'
In the global investment outlook for 2017, BlackRock warns fixed income assets are likely to be challenged amid broadly rising interest rates - and high valuations and tight credit spreads leave little buffer to protect against losses.
The group warned bond investors may take some comfort from what it sees as a low probability of a sharp and sustained surge in yields. It believes ageing populations, heavy institutional demand for yield and still-accommodative monetary policy should subdue the rise.
According to BlackRock iShares, investors are actively choosing from a variety of tools including ETFs to implement investment strategies, achieve resturn targets, manage risk levels and control costs.
ETFs it says offer 'markets on demand' - liquid, cost efficient access to a variety of different market exposures.
The firm adds that as the options ecosystem around large bond ETFs in particular continues to grow, investors are seeking more utility from products such as taking long or short positions either to hedge or enhance return opportunities.