Global bond ETF assets have more than doubled since 2020 to surpass $3tn, as higher yields, market volatility and demand for liquid fixed income exposure drove record inflows and trading activity, according to BlackRock’s latest bond ETF report. Vasiliki Pachatouridi, head of iShares fixed income product strategy Emea at BlackRock, discusses how investors are increasingly using bond ETFs during periods of market stress and what that signals about liquidity and price discovery in fixed income markets.
Q: Bond ETFs are again being framed as the market’s “shock absorbers” during volatility — but are they genuinely absorbing risk, or simply concentrating it in a more visible, tradable layer of the market?
A: Bond ETFs do not absorb or concentrate risk; they facilitate risk transfer in markets where liquidity is often fragmented and episodic. During periods of volatility, investors use ETFs to adjust exposure without immediately trading individual bonds. Bonds trade over the counter, while bond ETFs trade on exchanges, making them easier to transact during volatile periods.
By allowing investors to trade exposure without directly accessing underlying bonds, ETFs can continue functioning when cash bond market liquidity is weaker. Higher ETF trading volumes during stress periods may therefore reflect investors increasingly using ETFs to manage and redistribute risk.
Q: With iShares fixed income ETF volumes running roughly 1.4× above the three-month average, are we seeing genuine asset allocation shifts from European institutional investors — or simply investors using ETFs to trade volatility because underlying bond markets remain fragmented and opaque?
A: We are seeing both structural allocation decisions and tactical positioning. Higher yields have brought investors back to fixed income, while ETFs provide an efficient way to access markets where liquidity conditions vary. ETFs are also being used to adjust duration, inflation exposure and credit risk more quickly during periods of uncertainty.
In many cases, investors use ETFs first when repositioning portfolios before making longer-term changes to underlying holdings. This reflects the broader role ETFs now play in both strategic and short-term portfolio management.
Q: If investors are increasingly using bond ETFs as liquidity tools during stress events, what does that say about liquidity in the underlying bond market itself — is the ETF market becoming the real venue for price discovery?
A: ETFs are increasingly playing a role in price discovery, particularly during periods of market stress. Cash bond markets are fragmented and some bonds trade infrequently, which can reduce the availability of real-time pricing signals during volatile periods. ETFs, by contrast, trade continuously throughout the day.
This does not mean price discovery has shifted entirely away from the underlying bond market, but ETF prices can incorporate market information more quickly when underlying bond trading slows. ETFs are therefore increasingly acting as a real-time reference point during fast-moving market conditions.
Q: Are these flows a sign of conviction or a lack of it, with investors defaulting to liquid ETF exposures because they don’t trust underlying bond market liquidity?
A: These flows reflect how investors are increasingly expressing market views through ETFs rather than indicating a lack of confidence. Investors with views on rates, inflation or credit are using ETFs because they provide diversified and transparent exposure without requiring large-scale individual bond trading.
Underlying bond liquidity can vary significantly depending on market conditions and issuers. ETFs, which historically focused on the most liquid parts of the market, now provide access to a broader range of exposures including CLOs and high yield debt. They are increasingly being used both tactically and as core portfolio holdings.
Q: Historically, record ETF trading volumes often coincide with market stress events. Does the current surge signal defensive repositioning — or are investors tactically exploiting volatility in fixed income for short-term trading opportunities?
A: Elevated ETF trading volumes reflect different investor objectives simultaneously. Some investors are repositioning defensively by increasing exposure to government bonds, cash-like instruments and inflation-linked strategies. Inflation-linked bond ETFs have seen inflows of $414m, including $288m into euro inflation-linked strategies.
Other investors are using volatility to implement tactical trades where pricing dislocations emerge. ETFs are increasingly embedded in portfolio construction and liquidity management processes, meaning higher volumes do not necessarily indicate market panic but rather greater reliance on ETFs to adjust exposures during periods of volatility.
Q: With activity surging again, what evidence is there that bond ETFs won’t face the same liquidity stress criticisms seen in previous market shocks?
A: During periods when underlying bond liquidity was strained, ETFs continued trading, with prices adjusting to market conditions rather than ceasing to function. Most ETF activity also remained on the secondary market, limiting the need for transactions in the underlying bonds.
The bond ETF ecosystem has also grown significantly in scale, with broader market participation and tighter spreads than in earlier stress periods. According to BlackRock, these developments have strengthened liquidity conditions and market resilience during periods of heavy trading activity.
