In April, fixed income ETFs saw a surge in popularity, attracting $5.7 billion in net new assets, bringing the year-to-date total to $17.9 billion, according to data from investment manager Invesco.
This surge came despite a poor performance in fixed income markets during the same period, as expectations for rate cuts were postponed again. However, according to the researchers, amid the market uncertainty, “safe-haven” asset classes emerged as the main beneficiaries.
During April, the data showed that “safe-haven” asset classes led the influx into fixed income ETFs. Eurozone Government bonds ($2.4 billion), Cash Management ($1.3 billion) and US Treasuries ($1.1 billion) were among the leading categories for inflows.
Despite relatively light outflows, European Investment Grade Credit ETFs (-$0.5 billion) and USD Investment Grade Credit ETFs (-$0.2 billion) experienced net selling, while Emerging Market Government bonds remained out of favour (-$0.3 billion).
European ETFs hit record high assets under management in Q1 2024
Following a rally in March, fixed income markets experienced a sell-off once more in April, the research highlighted. Initial expectations of significant rate cuts from central banks were tempered as markets pushed back both the timing and extent of expected cuts for 2024.
Currently, 10-year government bond yields are nearing six-month highs, with limited easing anticipated by the market, the data highlighted. This scenario may present an opportunity for investors to increase interest rate risk in their portfolios.
According to the researchers, looking ahead, several factors warrant close attention in the fixed income market. These include the rating outlook, particularly for high-yield issuers, economic data which could impact spreads and inflation data which could swiftly alter bearish sentiment in the bond market. As investors navigate through uncertain times, a cautious approach alongside vigilance regarding market indicators remains paramount.
Fixed income ETFs hit record inflows in 2023
Paul Syms, head of Emea ETF fixed income and commodity product management at Invesco, commented: “Early in the month, stronger than expected US economic data kept upward pressure on US Treasury yields with inflation data in the middle of the month driving yields higher still. Fed Chairman Powell also indicated that rates may need to stay higher for longer given the lack of additional progress on bringing inflation back to target in recent months, which pushed expectations for the first rate cut to the fourth quarter. UK inflation also proved to be stickier than anticipated which backed up the bearish sentiment towards bonds. Over the month, the stronger data and less dovish tone from the Fed supported the US Dollar which strengthened while the Japanese Yen weakened above 160 vs the US Dollar for the first time since 1990.”
Read the full monthly fixed income update from the Invesco EMEA ETF team – with a spotlight on individual asset classes – here.
