Against the backdrop of a gradually unfolding global interest rate cut cycle, many assets that benefit from interest rate cuts have begun to shine, from US stocks to gold, from risk assets to safe haven assets, all of which have performed well this year. However, the market volatility and recession speculation since July have led to a certain degree of retreat in many risk assets; the progress of interest rate cuts has also led to a decline in cash return rates.

At the same time, a target with both interest rate cut benefits and defensive attributes has quietly gained strength, reaching a high point on August 5th when the market fell sharply, and has generally performed well since July - the bond ETF in the US stock market.

Taking the highly anticipated US Treasury bond ETF as an example, the ETF has achieved a return rate of 8% since July, and the bond index ETF-iShares iBoxx investment grade corporate bond (LQD.US) linked to the corporate bond has also been consistently attracting inflows, reaching a two-year high on multiple trading days recently. $iShares 20+ Year Treasury Bond ETF (TLT.US)$ For example, the highly anticipated US Treasury bond ETF $Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$ is also continuously attracting inflows, reaching a two-year high on multiple trading days recently.

According to BlackRock's data, global bond ETF inflows reached $60.5 billion in July, a record high; earlier, Invesco, the third largest ETF issuer in the United States, also revealed that the company's US stock bond ETF attracted $41 billion in inflows in the first half of this year, surpassing the annual record for 2023.

Is interest rate cut approaching, making bond ETFs a "safe haven" for funds?

Compared to bonds, ETFs linked to bonds are less affected by bond maturities, more flexible, and have stronger trading attributes, with the advantages of diversified investment and saving energy. With the promotion of hot demand, they are also expected to achieve more substantial gains. But why is the current bullish bond market causing such a huge inflow of funds into bond ETFs? There are several main reasons:

1. Interest rate cut lowers cash deposit rates, bonds offer high yields

First and foremost, the most important factor is the interest rate environment. In a environment of interest rate cut, the real interest rate decreases and the yield on cash deposits keeps decreasing. However, as bonds have fixed maturities and yields, for investors, the current high-interest rate environment allows them to lock in profits in advance. Therefore, the lower the interest rate level, the higher the price of US bonds will be pushed up.

In addition, whether or not the United States experiences a recession, it is expected to be bullish for the bond market. If there is no recession, the interest rate cut by the Federal Reserve will lower interest rates and make debt servicing ability stronger in a good economic condition; if there is a recession, the Federal Reserve will need to cut interest rates more significantly to push interest rates to even lower levels, at this time US bonds will stand out among major asset classes. Regardless of which scenario happens, US bonds have considerable investment and allocation value.

2. Bonds once again become the market's favorite hedge assets

According to the traditional inverse relationship, the correlation between stocks and bonds is negative. However, due to the aggressive rate hikes by the Federal Reserve since March 2022, both stock and bond markets have plummeted, completely overturning their traditional inverse relationship.

But in the past month, the trend of bonds has been opposite to that of stocks, with the potential to return to the trend before 2022. When there was a steep decline in early August, there was a sharp increase in demand for bonds in the market, with funds flowing into treasury bonds, corporate bonds, and other assets, causing the yield on 10-year US bonds to fall to its lowest level since mid-2023.

Strong demand! Global countries increase their holdings of US Treasury bonds in a big way.

As for US Treasury bonds, it is still the trend for global countries to increase their holdings. The latest Treasury International Capital (TIC) report released by the US Department of the Treasury shows that in June, China's holdings of US Treasury bonds increased by 11.9 billion US dollars compared to May, reaching the highest monthly increase since December last year.

It's not just China, but France, the United Kingdom, and Canada also increased their holdings of US Treasury bonds in a significant way in June. The TIC report also shows that the scale of US Treasury bonds held by foreign investors has reached a new historical high of 8.21 trillion US dollars, indicating that the demand for US Treasury bonds by foreign investors is still strong.

The reason behind this is also related to the high price of gold. Analysts believe that previously, many central banks of global countries prioritized increasing their holdings of gold as a measure to strengthen foreign exchange reserves and hedge investments. However, due to the surge in the price of gold this year, the cost of gold investment has skyrocketed, leading some central banks to refocus on US Treasury bonds. In fact, US Treasury bonds and gold have high similarities and substitution effects in terms of asset security, hedging, and liquidity.

How to choose different types of bond ETFs?

Bonds are different from stocks. They are a type of tradable securities issued by issuers to raise funds. They pay a certain proportion of interest at the agreed time and repay the principal at maturity, representing the creditor's claim on the debtor. Bond issuing institutions include governments, financial institutions, and companies, with increasing levels of risk and potentially increasing yields. For example, buying US Treasury bonds means lending money to the US government.

In the US bond ETF market, Treasury bond ETFs, total bond market ETFs, and corporate bond ETFs are the three largest types, accounting for about 80% of the total market size.

In the US bond ETF market, Treasury bond ETFs, total bond market ETFs, and corporate bond ETFs are the three largest types, accounting for about 80% of the total market size.

If classified by risk, bonds can be divided into investment grade bonds (rated BBB or above) and high yield bonds (junk bonds). The lower the rating, the higher the default risk, so the higher the risk premium and dividend yield. For example, $Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$ and $Ishares Iboxx $ High Yield Corporate Bond Etf (HYG.US)$ is a bond ETF that differentiates between the two risk levels.

$iShares 20+ Year Treasury Bond ETF (TLT.US)$ has performed the best recently.

Finally, if you don't want to be limited to a specific type, but want to invest in the overall bond market, you can choose a bond market ETF, including $Vanguard Total Bond Market ETF (BND.US)$ and $iShares Core US Aggregate Bond ETF (AGG.US)$ These are the two largest bond ETFs in the U.S. stock market and are very suitable for long-term investment.

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