December marked another strong month for fixed-income ETFs, bringing in net inflows of $5.1 billion despite the typical year-end slowdown, according to Invesco.
This performance capped off a record year for the sector, with fixed-income ETFs attracting $68.2 billion in net new assets (NNA) in 2023, the highest number ever recorded.
In 2023, investor demand focused on higher-quality fixed income, driven by sufficient yields that reduced the need to take on additional credit risk. With interest rates expected to be cut in the next 12 months, 2024 is poised to continue witnessing strong inflows into fixed-income ETFs
Paul Syms, head of Emea ETF fixed income and commodity product management at Invesco, noted that bond markets rallied significantly in December. Syms said, “Bond markets continued to rally in December, once again providing positive returns across the fixed income spectrum.”
The Bloomberg Global Aggregate Index recorded its strongest two-month return in 30 years, with a 5.0% gain in November followed by 4.2% in December. This rally was fueled by weaker economic data and a more dovish outlook from the Federal Reserve, which adjusted its rate expectations and inflation projections.
The turnaround in the bond market has resulted in positive fixed-income returns for the 2023 calendar year. Remarkable recoveries were seen in various markets, including U.S. Treasuries and USD-denominated investment grade credit, which both ended the year with substantial gains.
Fixed-income ETFs are expected to remain popular among investors seeking to lock in longer-term yields before interest rate cuts. The year 2023 saw EUR government bonds, EUR and USD investment grade credit, and fixed maturity bonds as leading categories for inflows. Conversely, US Treasuries, inflation-linked, and China bond categories experienced outflows.
Syms also emphasized that while fixed-income markets have rallied, driven by the end of the hiking cycle and the Fed’s dovish stance, the markets might need to pause due to the strength of the rally. However, the anticipated reduction in interest rates in the year ahead is likely to keep fixed income in high demand as investors look to capitalize on favourable yields.
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