Invesco writes that May was another strong month for fixed income ETFs with net inflows of USD5.5 billion, and notes that there was a clear preference for higher quality among investors, but caution over USD-denominated fixed income with concerns about the US debt ceiling.
The firm writes that fixed income ETFs have now attracted USD28.9 billion of net new assets in 2023. Paul Syms, Head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, comments: “There were mixed fortunes for fixed income markets in May. Yields on government and inflation-linked bonds ended the month higher in the US and UK but lower in the eurozone. Interestingly, while inflation data was the primary reason for higher UK Gilt yields in May, for US Treasuries it was concerns about the US debt ceiling that appears to have been the main influence.
“For credit markets, spreads on investment grade were little changed over the month and, while USD high yield spreads widened, EUR high yield spreads tightened. Meanwhile, the AT1 market continues to recover from the CS write-down in March, with spreads grinding tighter over the month.
“Fixed income ETFs had another solid month with net inflows of USD5.5 billion, taking year-to-date NNA to USD28.9 billion. While the preference for higher quality fixed income remained, it’s interesting to note that US Treasuries dropped from first place last month to fifth place in May, with USD IG lagging in sixth spot, potentially due to concerns about the US debt ceiling. Indeed, the top two categories – EUR government bonds and EUR IG credit which accounted for ~45 per cent of net inflows – potentially signalling some investor caution about USD-denominated fixed income.
“Outflows were relatively muted but with the theme being for higher quality, it’s potentially worth noting that there was some reversal in demand for high yield along with selling of EM government bonds and EM investment grade credit.”
Looking forward, Syms says that there could be cross market opportunities, as diverging central bank policies are being driven by the outlook for inflation. He also notes that as central banks experience peak rates these should be supportive of credit and that the AT1 market performance will likely drive a risk appetite.