When Will the Fed Stop Raising Rates? That’s the Trillion-Dollar Question for Bond Investors

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Asset managers have been counting on what BlackRock calls a “generational opportunity" in the bond market, now that yields are at decade-plus highs. Investors ranging from pension funds to retirement savers should be buying longer-term bonds to lock in higher rates, their thinking goes, spurring a flood of inflows to bond funds. BlackRock, for one, has projected assets under management at its bond exchange-traded funds to triple to $2.5 trillion by 2030.

There is just one problem: Those flows have yet to materialize. Relentless losses in the bond market have spooked investors who appear hesitant to jump in until they feel more confident that rates have peaked. Investors pulled $78.6 billion from U.S.-based taxable bond funds in the 12 months through August, according to Morningstar.

That is well below the nearly $300 billion they pulled from equities over the same period but a painful sum, regardless, for asset managers hoping for a windfall. The companies earn a percentage fee on the money they manage, so their earnings are affected by swings in market prices and the amount of money coming in or out. “Investors remain wary of continued Fed hikes," said Jeff Klingelhofer, co-head of investments at mutual fund shop Thornburg Investment Management.