(Dec 1) : A wall of money worth more than a quarter trillion dollars is changing the face of the corporate bond market and has left unwitting “mom and pop” investors among the main drivers of the cost of capital for the world’s largest companies. Through bond purchases often criticized as indiscriminate they have taken on a role that was once the preserve of highly-paid traders — using intricate bond mathematics — in New York, London and Tokyo.
Triggered partly by social media and financial influencers, this change — the scale of which traders, portfolio managers and credit analysts are struggling to fully understand — is coming not from central bank initiatives, or Wall Street, but farmers, teachers, doctors and retirees. Many are buying baskets of bonds as a way to put money that’s been sitting idly in savings accounts to work.
The vehicle for this transformation? Fixed-maturity funds. First conceived at the end of the last century, these funds — powered by retail investors — have come into their own since 2023, emerging as a force in global credit markets, and are now valued at US$260 billion and rising, according to data from Morningstar Direct, the investment research company. The funds’ assets under management have tripled since the start of 2023, based mainly on data from the US and Europe.
“It’s about turning savers into investors,” says Vasiliki Pachatouridi, the head of BlackRock’s iShares fixed income product strategy in Europe, the Middle East and Africa. These funds are “making investing in bonds simple, particularly for a generation that may have never invested in a bond in their life.”
The collective force of this phenomenon, however, is distorting the basic premise of the credit market — to quantify the probability of a company repaying its debt — with a growing number of bonds now snapped up regardless of the compensation they offer to investors, according to portfolio managers. It’s raised alarm that investors are not sufficiently covered for the risks they are taking amid signs that this bond buying has crept into the most esoteric, high-yielding corners of the credit market, such as junk bonds where the risk of default is much greater.
Corporate bonds — the value of which move in line with changes in interest rates and the perception of companies’ creditworthiness — have previously been seen as out of reach for most retail investors. They were thought to involve too many moving parts, but a fund that looks like one big high-yielding bond is much easier to understand and market.
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BlackRock’s fixed-maturity fund assets with exposure to corporate bonds have risen more than 10-fold in the past five years to US$32.5 billion, giving it a lead in the hyper-competitive market. Funds domiciled in the US have quadrupled in terms of assets under management since the beginning of 2023, with exchange traded funds leading flows into US high-grade credit almost every week since the start of 2025, according to Bank of America Corp.
In their most established region, Europe, fixed-maturity funds account for more than 5% of the entire investment-grade market. Given their very similar modus operandi, they are seen as one homogeneous buyer base, and no other single active or passive credit fund is even close to this share.
Morningstar has identified more than 1,100 fixed-maturity funds across nearly 200 providers. It’s now trying to identify the best choice for individual investors, but because the funds are so diverse in their content, it’s hard to rank them, says Mara Dobrescu, senior principal for fixed income strategy ratings at Morningstar, who has been tracking them since 2022.
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Her interest has grown with the level of assets under management, and her aim is to dispel some of the misunderstandings that surround them. Some funds, she says, were being marketed as safe as fixed deposits, but the “comparison is quite misleading” as it downplays “the level of credit risk that is embedded in these products.”
“We wanted to highlight some of the things that investors need to be aware of before investing,” Dobrescu says. “The biggest risk is just getting the security selection wrong. As the portfolio manager, if you make a mistake in selecting that initial basket of securities, then over the life of the fund, it can have a pretty catastrophic effect on performance.”
“That’s maybe not immediately apparent to buyers of these funds,” she adds.
The Blander End of Investing
The premise of a fixed-maturity fund — whether a mutual or exchange-traded — is relatively simple: investors place their money in a pot during a subscription period. The portfolio manager uses the money to buy bonds maturing around the same time, normally between three and five years.
The funds don’t make bets on price moves as all bonds are held to maturity, at which point, assuming no default, they are repaid at face value. This makes the yield-to-maturity the only number that matters and with more than a thousand of these funds in existence, the number a portfolio manager offers an investor needs to be higher than the one provided by a rival across the street. This competition has driven some fixed-maturity funds — which should be at the blander end of investing — into high-risk areas previously reserved only for sophisticated hedge funds, like derivatives, subordinated debt and hybrid bonds.
Pongsun Anurat, a portfolio manager in Bangkok, Thailand, has built more than 100 fixed-maturity funds amounting to around US$5 billion, the bulk since 2023 according to internal data at his employer Krungsri Asset Management. What’s changed, he says, is the accelerated pace at which funds are being rolled out by the firm — at least one a week at the moment.
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Anurat believes some of the investor appetite for bonds in Asia is driven by the troubles of property developers in the Chinese equity market and a broader discomfort with the volatility of stocks.
That apparent caution is central to the attraction of these funds. “Over the past few years, the name of the game for most clients is income generation,” says Raphael Thuin, head of capital markets strategies at Tikehau Capital. “The ultimate product you can put in your portfolio to generate income in a very linear, predictable way is fixed-maturity.”
Jack Olivieri, a 30 year-old software engineer based in Berlin, is candid about his investing strategy: “I don't like to act on a gut feeling,” he says, “but at some point I have to take a leap of faith in some product and see how it performs.”
He’s invested in two fixed-maturity funds that end in December 2027 with the target of using his returns to buy a BMW 3 Series Touring car. Longer term he sees this as laying the path to an early retirement. “I could go on the market and shop for a bunch of bonds with a maturity that is pretty close to my goal but even that’s time-consuming and not super diversified,” he says.
“I want maximum diversification and I want something easy,” adds Olivieri, “ETFs are easy.”
But the runaway success of the sector has triggered unanticipated complications. Volatility is being suppressed by the indiscriminate buying, which means that negative news barely moves the needle on risk premiums. For instance, the bond prices of most European junk-rated auto parts companies were trading in line with safer peers such as utilities at the start of the year despite being ripe for a brutal selloff when US President Donald Trump introduced long-heralded tariffs. The levies were later shelved, but it was a reminder of the distortive effect of this type of blind buying — that the threat of Trump’s measures did not appear to have been factored in.
Borrowers are also changing their behavior by issuing shorter-dated bonds in the knowledge that once these bonds fulfil the basic requirements of fixed-maturity funds, they have an almost guaranteed buyer base. But it leaves a higher level of corporate debt to be repaid over a shorter period of time.
Subordinated bonds issued by Mobico Group Plc, the British coach operator formerly known as National Express, have fallen to about half their face value in recent months as traders lost faith in the firm being able to exercise its early repayment option. Among the holders were at least five fixed-maturity funds, based on data compiled by Bloomberg. Mobico decided last week not to repay the bond on the first call date. By that stage the funds had already sold off their exposure at a loss, based on filings.
Fixed-maturity funds are “clearly affecting the market,” says Joost de Graaf, co-head of credit at wealth manager Van Lanschot Kempen of fixed-maturity funds. “We compare it with the CSPP,” he adds, referring to the European Central Bank’s Corporate Sector Purchase Programme to buy company bonds and help revive economies after the euro area debt crisis. The ECB “bought 20% of every bond that came to the market and didn't look at what the spread was,” adds de Graaf.
The CSPP ran from 2016 to 2022 and ignited the largest credit-buying spree in central bank history, depressing prices and — alongside the ECB’s purchases of government debt — forcing many yields into negative territory. Now, “these guys in fixed-maturity funds buy things yielding a bit more than the market and they don't really look at spreads or how much is at risk,” de Graaf says.
That’s denied by advocates: “Fixed-maturity funds require the same rigorous credit analysis as any other credit strategy,” says Thuin. “Fundamental research and disciplined bond selection are essential components of FMF portfolio construction. The quality of underwriting remains the key driver of performance."
Once created, there’s no reason for a portfolio manager to fiddle with a fixed-maturity fund. No need to buy cheaper when prices sag or take profits when they rally. “It reduces volatility because you effectively have this cohort of the market that is ‘buy-and-hold’ now and it gets locked away,” says Darpan Harar, portfolio manager at Ninety One, the global investment manager.
It produces a price distortion between the bonds that fixed-maturity funds buy and those they don't.
This smothering of volatility is evident in the three-to-five year maturity range. But it’s also affecting daily movements in credit spreads — the risk premium attached to a corporate bond over safer government ones. That has shrunk 35% in the three to five-year range since fixed-maturity funds’ assets ballooned, a larger drop compared to the rest of the spread curve, based on data compiled by Bloomberg.
That’s raised fears that the compensation for holding corporate debt no longer covers the risks, from normal business, to US tariffs or misjudged management decisions. Traders and an army of analysts usually bake this into credit spreads, but having a large chunk of outstanding bonds locked away in fixed-maturity funds — and not being traded — distorts the picture of the market.
Since the end of 2022, spreads in the three to five-year maturities have tightened — meaning the yield they offer compared to benchmark rates has fallen — more than in other tenors, based on Bloomberg’s BVAL valuations.
“You’ve got this huge pool of cash that’s coming in,” says Andreas Michalitsianos, portfolio manager at JPMorgan Asset Management. “The proliferation of fixed-maturity funds is weighing down spreads.”
Filling the Education Gap
Italy has a solid claim as the birthplace of fixed-maturity funds. The first example Morningstar could find was launched in 1999 by Banca Fideuram, now part of Intesa Sanpaolo SpA. Those funds were created to pool zero-coupon Italian government bonds — a model typically used to explain, in basic terms, how a bond works. They are a far cry from the sophisticated portfolios of today.
Along with the US and Spain, Italy ranks as one of the biggest markets for fixed-maturity funds. Italians can walk into any post office — the national operator markets its own line of funds — or use apps to invest. And invest they have, accounting for almost a fifth of the total global market.
The greater complexity involved means investors have a lot to learn, and the biggest finance school for ordinary investors today is social media.
Paolo Coletti doesn’t like the term “influencer”. He prefers to be described as a financial teacher instead. An academic with a background in research on computational fluid dynamics and linguistics Coletti has never worked in finance. In the 2010s he was asked to teach a computer science course to economics students at Italy’s Free University of Bozen-Bolzano. To help them, he created videos which were uploaded to YouTube. Later, he says, people began asking him to make educational videos specifically about finance.
Over the last two years his videos on fixed-maturity ETFs — a sector he has not invested in — have drawn comments from Italians who view the funds as a “real revolution” in terms of the investment landscape. The topic is cropping up more and more frequently, he says, among his 176,000 YouTube followers.
A fixed-maturity, gives retail investors “control over what they will get,” says Coletti. “They can also use it for planned expenses.”
For America’s retirees, the motivation is different: It’s about having a steady income when they can no longer rely on a paycheck. That’s propelled many ordinary American investors toward fixed-maturity ETFs.
But the current boom in Europe and the US is untested. As of yet, there has been no wave of defaults just individual cases where bonds have tanked and fixed-maturity funds were among the holders of the debt.
There is, however, a cautionary tale from Asia, where China Evergrande Group — at the time the country's biggest property developer — defaulted on its debt in the early 2020s after it was hit hard by a regulatory crackdown on excessive borrowing. Its demise impacted investors far beyond its domestic market and others closer to home. A fixed-maturity fund launched in 2019 by Value Partners Group Ltd, an asset manager in Hong Kong, ended up with a net asset value of 74 cents on the dollar, after its second-largest holding — an Evergrande bond due in 2022 — defaulted.
The huge growth in fixed-maturity funds means the stakes are even higher today than they were in 2022, with the impact particularly acute in the riskier corners of the market.
“What’s happening with fixed mandates is that the asset class is becoming abused by a lack of fundamental understanding,” says Andrea Seminara, chief executive of Redhedge Asset Management LLP, a London-based hedge fund. Seminara has a vested interest — this scenario makes it harder to outperform broad credit market indices and peers — but his complaint is that indiscriminate buying by fixed-maturity funds is squeezing spreads and obscuring the level of risk involved. He argues that these trades should be left to professional investors not acting blind.
“What happens when the music stops?” he asks. “We saw what happened in Asia and it wasn't nice.”
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