Conflict, volatility, and bond ETFs

The escalating conflict in the Middle East has sparked a new wave of uncertainty over geopolitical risk, and its implications on energy prices, inflation, and the future path of rates. Yet again, in periods of stress, investors have turned to bond ETFs to adjust portfolios with speed, efficiency, and precision, as iShares bond ETFs gathered US$3.7B in inflows in the first week of March. This month, we explore the bond ETF playbook to position for volatility and navigate rapidly evolving markets.

Revisit the inflation toolkit

Amidst the energy disruption and price shock to the oil market, inflation expectations have shot up as markets factor in higher expected energy prices. As inflation concerns return to the front of mind, investors can add TIPS ETFs to portfolios as a hedge against the risk of higher-than-expected inflation.

In particular, with widening inflation expectations having been concentrated in the short end, short duration TIPS offer a balance between protecting against short-term inflation upside surprises, while keeping interest rate risk low.

Barbell with US Treasuries

Investors have flocked to short duration US Treasuries for a defensive anchor to add stability to portfolios. 0-3M UST exposures, which have dominated inflows with US$3B in the past week, allow investors to put cash to work at the front end as inflation fears push out Fed cuts and keep rates higher for longer.

At the same time, with market volatility reinforcing USD strength, renewed attention on USD assets means that investors can look to build barbell expressions with the granular maturity buckets of the US Treasury ETF suite to adjust duration tactically along the curve.

Lock in yields with iBonds

Target maturity ETFs continue to deliver a degree of certainty in a period where markets are far from certain. Designed to mature like a bond, iBonds offer a means to control outcomes over various investment horizons, by allowing investors to lock in yields across multiple points on the curve, alongside the liquidity and diversification benefits of an ETF vehicle.

Additionally, elevated rates and wider spreads over the recent weeks mean that yields have reset higher, offering a more attractive entry point for investors to secure today’s income levels.