Amid recent bouts of stock volatility and a new Fed chair coming into a complex inflation environment, the action in bond ETFs is sending an important signal to the market. "Flows tell the story," Steve Laipply, global co-head of iShares fixed-income ETFs at BlackRock, told CNBC's Dominic Chu this week. And that is a story of rising investor interest in yield across the fixed-income market. "In the U.S., bond ETF flows are up a shocking 60% relative to last year," Laipply said. Laipply said a significant share of the flows are going into U.S. treasuries, but there also has been a significant move by investors into multi-sector income ETFs. "The income story is very robust and enduring, because rates will continue to move around and 'real yields' are definitely an opportunity," he said, a reference to bond yields net the rate of inflation. "Real yields reflect a growth story," he said, led by the AI boom and the anticipated increase in productivity that is tied to it. Investor interest in multi-sector income funds, according to Laipply, is also an indication of greater emphasis on "income per unit of duration." "The idea of getting a little more duration, but really still focusing on income ... that's sort of the sweet spot," he said. "As a bond investor, real yield is your very good friend," George Bory, chief investment strategist of fixed income at Allspring Global Investments, told Chu. New Federal Reserve chairman Kevin Warsh has put the market on watch for signs of greater volatility in bonds as he shapes a new approach at the Fed. "The most significant one, at least right now, is about the lack of forward guidance," Bory said. When the Fed telegraphed its every move, managing duration risk was a less active process for investors. Now there will be more of an "uncertainty premium" built into the market, he said. At his first FOMC meeting last week, Warsh was clear about maintaining the Fed's inflation-fighting credentials for the time being, Bory said. "The very front end of the curve is now very steep, as the market is now pricing in multiple rate hikes from the Fed. You don't have to move very far out the curve to start to see a very material increase in yields," Bory said. Laipply said recent declines in what is known as the breakeven inflation rate, which have been falling "very, very sharply" at both the short and long end of the treasuries curve, say to him that "the market is sniffing out something here." The breakeven inflation rate is a measure of the difference between standard treasury yields and treasury- inflation protected securities. Laipply said with "breakevens' where they are, it is not necessarily a bad time for investors still worried about inflation to consider short-dated TIPS. But many bond investors, he said, are "looking past this volatility, and no matter what yields are, they are at a level where income is very attractive relative to what it has been,"...
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