Fixed income ETFs attracted $7 billion in net new assets in May, bringing the year-to-date total to $24.8 billion, data has shown.
According to investment manager Invesco, this surge came after a volatile start to the year, where bond markets experienced significant sell-offs during the first four months but have since stabilised, responding to economic data and central bank commentary.
Safe haven asset classes, including US treasuries, cash management, and euro government bonds, were among the top five categories for the month.
US fixed income saw strong performance, buoyed by weaker economic data and lower-than-expected inflation. In contrast, euro denominated fixed income returns were subdued, despite the European Central Bank signalling potential rate cuts in June, which offered some support to the high yield market.
Fixed income strategies drove net inflows for April, data shows
Paul Syms, head of Emea ETF fixed income and commodity product management at Invesco, commented: “US fixed income performed well in May, whereas European bonds struggled to make significant progress, although high yield markets found some support from the ECB’s guidance on future rate cuts.”
US Treasuries attracted $2.4 billion in net new assets, cash management saw $1.9 billion and Euro governments garnered $0.6 billion. Inflation-linked bonds, previously out of favour, saw a resurgence with $0.7 billion in net new assets, making them the third most popular fixed income category. Aggregate bonds and fixed maturity bonds also continued to see strong inflows, while Euro investment grade credit faced heavy selling, losing $0.7 billion.
ECB rate cut could be opportunity for quality bonds
Despite recent rangebound trading, bond markets are influenced by economic data and central bank signals. The ECB is expected to cut rates in June, while rate cuts from the Bank of England and the Federal Reserve remain data dependent. Government bond yields are high within their trading range and credit spreads are tight, indicating that interest rate risk may be more favourable than credit risk given current valuations.
Ratings outlook, particularly for high yield issuers, economic data which could impact credit spreads, and central bank commentary on the timing and extent of rate cuts will be crucial in shaping the future direction of bond markets, according to the analysts.
