Flows into fixed income ETFs rebounded in December with $4.4 billion in net new assets (NNA), bringing the 2024 total to $62 billion, the third-highest annual figure on record, according to investment manager Invesco.
The increase reflects a strong preference for “safe-haven” assets as investors navigated ongoing economic and policy uncertainties, according to Invesco’s data.
Paul Syms, head of Emea ETF fixed income and commodity product management at Invesco, explained that bond markets faced headwinds in December, primarily from rising government bond yields. “Bond markets generally performed poorly in December, driven by a rise in government bond yields with curves bear steepening over the month,” Syms said. He added that US economic data indicated resilience, with non-farm payrolls rebounding and hourly earnings exceeding expectations, contributing to a sharp rise in Treasury yields. The 10-year US Treasury ended December 46 basis points higher, reflecting these pressures, he added.
Globally, central bank actions played a key role in shaping market conditions. The Federal Reserve implemented a hawkish 25 basis point cut and adjusted its economic projections, removing 50 basis points of rate cuts expected in 2025. Meanwhile, the European Central Bank delivered a 25 basis point cut, and the Bank of England maintained its policy stance. Despite rising risk-free rates, investment-grade credit markets benefitted from tightening spreads, particularly in sterling and euro markets, which ended the month 12 and 7 basis points tighter, respectively.
Fixed income ETFs attracted inflows to defensive categories, led by $3.5 billion into cash management ETFs and $1 billion into government bond ETFs, driven largely by gilt-focused products. High yield and emerging market debt ETFs saw outflows of $0.4 billion and $0.3 billion, respectively, continuing a broader trend of caution among investors.
For 2024, government bond ETFs were the strongest category, attracting $25 billion in NNA, followed by cash management ETFs at $18 billion. However, emerging market debt underperformed, with net outflows of $2.7 billion for the year.
Syms pointed to a “cautious” outlook for 2025, citing uncertainties around inflation, US fiscal policy, and substantial Treasury maturities requiring refinancing. “The path of least resistance appears to be a steeper yield curve in the months ahead. Investors may decide to keep their powder dry in the near-term, continuing to focus on ‘safe-haven’ assets such as cash and short-dated government bonds, while they wait for better opportunities to increase duration risk within their bond portfolios during 2025,” he said.
Syms also noted that credit spreads remain at historically tight levels across both investment-grade and high-yield markets, reflecting a stable economic outlook. Despite concerns in other areas, the probability of a recession is seen as relatively low, and corporate balance sheets are generally healthy. Given these conditions and the attractive yields currently available, there is little reason for spreads to widen significantly in the near term, he added. “While spreads may struggle to tighten much further, taking the additional carry offered by credit markets is likely to remain appealing,” Syms said.
Syms anticipates that central banks will continue easing monetary policies in the months ahead, leading to declining returns on cash and a steepening of yield curves. “Investors are likely to start locking in yields currently available in bond markets by rolling along the yield curve in coming months,” he added.
