Investors favor AI data center bonds over traditional options

A unique trend is emerging in the fixed-income market, driven by strong interest in bonds for AI data centers. As stock prices fall, many investors are shifting their focus to bonds, especially amidst ongoing market uncertainty linked to President Trump's policies. Last week, the S&P 500 gained slightly after four weeks of losses. The recent move to bonds is not unexpected given the market's volatility. Investors pumped nearly $90 billion into bond funds in the past month, almost matching the $126 billion that went into stock funds. This shift is being discussed by experts as a rare event in the exchange-traded fund (ETF) space. Two types of bond funds are especially popular right now. Actively managed core bond funds and short-duration bond funds, particularly ultra-short U.S. treasuries, have attracted significant investment. So far this year, ultra-short bond ETFs have received over 40% of all flows into fixed-income ETFs. The traditional "60-40 portfolio," which combines 60% stocks and 40% bonds, is making a comeback, according to managing director Jeffrey Katz. He believes that investors can benefit by actively managing their bond investments rather than sticking to traditional index strategies. Much of the recent investment is in AI data center bonds, reflecting a $35 billion surge in this area due to the growing demand for cloud computing. Katz also emphasizes investment in residential housing market bonds and commercial real estate, predicting a rebound as workers return to offices. While traditional indices like the Bloomberg Barclays Aggregate Bond Index (AGG) are widely used, Katz argues that active management can offer better returns. His firm claims the TCW Flexible Income ETF has significantly outperformed the AGG since its inception in 2018. F/m Investments is also responding to investor concern about inflation by offering short-duration treasury bonds. Their focus is on bonds that are less exposed to long-term risks, including newly launched ultra-short ETFs aimed at protecting against inflation. Overall, the trend in the bond market indicates a shift towards safety and shorter-term investments as investors navigate uncertain economic conditions.