Investors are still putting money into bond funds and ETFs, with demand stronger for shorter-dated maturities and those protecting against inflation

ETFs that provide broad exposure to the U.S. investment-grade market are down this year through Tuesday. But some fixed-income strategies are paying off in 2026.

The U.S. bond market has been under a lot of pressure as stubborn inflation and a ballooning debt burden keep pushing up Treasury yields, but rather than scare off fixed-income investors, the higher returns are actually attracting them.

The dynamics of the market have changed, as investors look to hide from the more volatile areas, such as longer-dated bonds. There are ways that investors can still benefit from the higher yields, while also reducing the drain from rising inflation and falling bond prices. Yields and bond prices move in opposite directions.

On Wednesday, bonds saw some more selling, with the yield on the benchmark 10-year Treasury note BX:TMUBMUSD10Y reaching an intraday high of 4.817%, the highest yields seen since November 2023, before paring gains. Later Wednesday, the 10-year yield was trading up less than 1 basis point (0.01 percentage points) at 4.80%, toward a six-session streak of gains.

Not only has inflation been sticky - enough that traders are now expecting the Federal Reserve to raise its policy rate later this month - but BlackRock Chief Investment and Portfolio Strategist Gargi Chaudhuri said "solid" economic growth and a deluge of corporate debt to fund the build-out of artificial intelligence has also pushed up yields.

Despite this strain on longer-dated bonds, money was still flowing into the fixed-income market.

Bond ETFs listed in the U.S. attracted $55 billion in new money in August, bringing year-to-date inflows to $407 billion. That put the category on track to surpass the annual record of $448 billion seen in 2025, according to a note from Matthew Bartolini, global head of research strategists at State Street Investment Management.

Drilling down, areas of the bond market attracting interest include TIPS, or Treasury Inflation-Protected Securities, as they can provide a hedge against rising inflation, BlackRock's Chaudhuri told MarketWatch in a phone interview, with shorter-duration offerings generally outperforming those with longer durations.

The iShares TIPS Bond ETF TIP has gained a total 0.5% this year through Tuesday, including dividends, while the iShares 0-5 Year TIPS Bond ETF STIP, which focuses on shorter-duration TIPs, has seen an even bigger total return of 1.9% over the same period, FactSet data showed. In comparison, the total return on the iShares 20+ Year Treasury Bond ETF TLT has been negative-3.2%.

Investors added about $3.6 billion to the iShares 0-5 Year TIPS Bond ETF this year through August. And to start the month of September, the fund booked a $96 million inflow, the largest one-day intake since late May, according to FactSet data. The iShares TIPS Bond ETF attracted about $1.6 billion in 2026 through August, with its $32 million inflow on Tuesday marking its biggest since Aug. 26.

TIPS aren't the only area of the market attracting interest. BlackRock has seen "very strong" inflows this year into an ETF focused on ultra-short-term Treasury bills, Chaudhuri said.

The firm's iShares 0-3 Month Treasury Bond ETF SGOV, which has produced a total return of 2.4% this year, has taken in about $37 billion in new money this year through August, including $936 million of inflows over the week through Aug. 31, FactSet data showed. That compares with just $1.9 billion in inflows into the 20+ Year ETF.

That far exceeds the $6.5 billion in inflows in 2026 through August for the iShares Core U.S. Aggregate bond ETF AGG, which has an effective duration of 5.8 years, as well as the roughly $21 billion that the Vanguard Total Bond Market ETF BND, with an average duration of 5.7 years, took in over the same period.

Meanwhile, there have been worries that the rise in yields will make holding riskier stocks less attractive for investors. But so far this year, that hasn't been the case.

All equity funds saw inflows of $92.9 billion, or 0.9% of AUM, in August, while U.S.-only equity funds took in $60.9 billion, or 0.4% of AUM, according to data provided by Winston Chua, a liquidity analyst at EPFR. That's much more than the $26.5 billion, or 0.07% of AUM, that all equity funds took in a year ago, and compares with $2 billion of outflows for U.S. equity funds seen in August 2025.

And why not? The total return for the State Street SPDR S&P 500 ETF SPY this year has been 12.8% as of Wednesday afternoon, which is well above that of even the shortest-dated bond ETF.

-Christine Idzelis