Investors ramped up their risk appetite for fixed income in April, pouring money into bond funds that offer attractive yields, according to data from State Street Investment Management. The asset manager found that investors directed some $15 billion into credit-sensitive bond sectors via ETFs last month. Those inflows included roughly $7 billion heading into investment-grade corporate bonds, along with about $3.8 billion into high-yield bond ETFs. Funds with a focus on bank loans and collateralized loan obligations (CLOs) — beloved among income-hungry investors — saw about $2.5 billion in new flows of cash last month, State Street found. Two factors were behind this renewed appetite for risk, according to Matthew Bartolini, global head of research strategists at State Street Investment Management. First, investors grew reassured that the worst outcome in the Iran war wouldn’t come to pass, he said. That positive sentiment was strengthened by solid earnings results from an array of companies — not just the Big Tech heavy hitters. “It’s not just a heliocentric tech megacap market — you’re seeing broader growth,” Bartolini said. “That in conjunction with the worst outcome [in the Middle East] coming off the table, which could’ve had an impact on economic growth, those two factors drove this risk-on sentiment.” Investors’ stampede into higher-yielding corners of the fixed income market came as they also enjoyed huge gains from the stock market. The S & P 500 soared 10.4% in April, its best month since 2020. Picking up yield Those who hopped into higher yielding corners of the bond market are being rewarded. The 30-day SEC yield is approaching 7% for a number of ETFs holding bonds that are below investment grade. The iShares Broad USD High Yield Corporate Bond ETF (USHY) has a 30-day SEC yield of 6.94% and an expense ratio of 0.08%. The State Street SPDR Portfolio High Yield Bond ETF (SPHY) has a 30-day SEC yield of 6.84% and an expense ratio of 0.05%. Similarly, bank loan and CLO ETFs are also offering attractive yields. These funds invest in floating-rate instruments, which offer higher rates linked to a specific benchmark. There’s an element of credit risk tied to the underlying investments: The bank loans themselves may be below investment grade, and CLOs may include floating rate loans made to non-investment grade businesses. However, investors in ETFs holding these instruments also compensated with attractive yields. The Janus Henderson AAA CLO ETF (JAAA) has a 30-day SEC yield of 4.74% and an expense ratio of 0.2%, while Invesco’s Senior Loan ETF (BKLN) has 30-day SEC yield of 6.28% and an expense ratio of 0.65%. Balancing risk While these riskier fixed income funds could complement a diversified portfolio, investors should avoid making them an outsized portion of their holdings. “When we talk about bond investing, diversification is the big benefit,” said Collin Martin, head of fixed income research and strategy for the Schwab Center for Financial Research. “You get that with high quality investment grade bonds, but not necessarily with bank loans and high yields,” he added. Martin noted that the average yield spread between high yield bonds and Treasurys is “very low,” at an average of 2.6 percentage points. This spread is the difference in rates between the riskier issues and risk-free Treasurys. “Your outperformance relative to Treasurys is really low,” he said. “If you see high yield bond prices fall relative to Treasurys, it doesn’t take much to wipe out that spread.”