Inflows into fixed income ETFs decelerated in February, although the market remains supportive of the asset class in anticipation of rate cuts later this year.
Analysis from fund manager Invesco found that net new assets for fixed income ETFs reached US$2.8 billion in February.
This brings the year-to-date total to more than $10 billion, however the February figures are significantly lower than the previous month in which there were $8 billion in inflows.
ETF assets predicted to reach US$19.2 trillion by June 2028
According to Invesco, the risk-on tone and strong returns from equities led to the subdued totals over the month.
However, the prospect of cuts to interest rates later this year means that Investors are set to take advantage of opportunities to increase duration to lock in yields before central banks start easing policy.
“Fixed income experienced challenges in February due to stronger economic data pushing back rate cut expectations and putting upward pressure on bond yields,” said Paul Syms, head of EMEA ETF fixed income and commodity product management at Invesco.
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“Additionally, the risk-on tone and strong returns from equities meant that fixed income ETFs flows were relatively subdued over the month. Nevertheless, the backdrop for fixed income remains broadly supportive with interest rates likely to start coming down in the middle of the year,” said Syms.
“It therefore seems likely that investors will take advantage of opportunities to put cash to work in bond markets, increasing duration to lock in yields before central banks start easing policy.”
The February data also revealed a divergence between between higher and lower quality bond markets with higher quality asset classes such as government bonds and investment grade credit suffering slightly negative returns due to rising yields.
In contrast, lower rated credit markets performed better, supported by lower durations and higher yields, while also benefiting from spread tightening during the month.
