The September Federal Reserve rate cut caused investors to re-allocate their fixed income ETF exposures, with recent flow data showing US Treasuries being sold and euro-denominated investment grade corporate bonds gaining strongly, according to analysis by fund manager Invesco.
Flows into fixed income ETFs saw net new assets of $6.8 billion in September, according to data from fund manager Invesco and Bloomberg.
The “robust” flows came mainly on the back of the Federal Reserve rate cut of 50 basis points.
Paul Syms, head of Emea ETF fixed income and commodity product management at Invesco, said: “September saw a further rally in bond markets, supported by the Federal Reserve cutting rates for the first time this cycle.”
He added: “The decision announced in the middle of the month was for a 50-basis point rate cut, accompanied by a relatively dovish outlook. The Fed anticipates that quicker and deeper cuts will be needed over the next couple of years to support the economy, more so than previously expected.”
Flow to fixed income ETFs are potentially on course to beat last year’s record of $68 billion, with over $50 billion of net inflows so far this year, said Syms.
He described emerging market government bonds as returning to favour, seeing strong inflows.
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Euro-denominated investment grade credit added $1.7 billion during the month, followed by emerging market government bonds with $1 billion, mostly favouring hard currency exposures. Longer duration products saw net selling, while shorter duration products experienced net inflows.
Noting that cash management ETFs have been the strongest fixed income category for inflows so far this year, and that US money market fund assets are sitting at record levels, Syms said that until now there had been no need for investors to increase interest rate risk because inverted government yield curves and relatively flat credit curves had provided attractive level of yields on cash and short-dated bonds.
“However, as yields and therefore expected returns on cash decline now that central banks are cutting rates, investors are likely to start to increase duration by extending along the curve to lock in yields currently available in bond markets. In early August, USD investment grade credit ETFs experienced material inflows as spreads widened from relatively tight levels as yen carry trades were unwound. Similarly, it is likely that the wall of cash will be put to work on any spikes in yield, now that the easing cycle has started.”
