June was a strong month for fixed income ETFs with net inflows of USD7.2 billion, according to Invesco, which writes that despite a positive month for riskier assets, there was a clear preference for higher quality among investors.
Demand for Gilts increased following the Bank of England rate hike, and fixed income ETFs have now attracted USD 32.7billion of net new assets (NNA) in 2023.
Paul Syms, Head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, comments: “The US employment report early in June showed strong job gains, which set the tone for a month in which central banks appeared to sound increasingly hawkish around the need for further policy tightening to bring inflation down. While the Federal Reserve left rates unchanged for the first time this cycle, the European Central Bank hiked rates by 25bp and the Bank of England increased its pace of tightening with a 50bp hike due to inflation remaining elevated and wage growth accelerating.
“While they took different decisions in June, all three central banks indicated that further monetary policy tightening would be needed to bring inflation down. Nevertheless, June was broadly a positive month for riskier assets with equity markets generally performing well and lower rated bonds outperforming higher quality fixed income.
“Fixed income ETFs had a strong month with net inflows of USD7.2 billion, taking year-to-date NNA to USD32.7 billion. EUR investment grade bonds, which has been the strongest category this year, led once again with a further USD1.4 billion NNA, taking net inflows so far this year above USD10 billion. The bias for higher quality remained with EUR government bonds and US Treasuries taking second and third spot with USD1.3 billion and USD1.2 billion NNA respectively. Aggregate bond ETFs continued to see steady demand with net inflows of USD710 million.
“Having been out of favour for most of this year, floating rate notes (FRNs) experienced NNA of USD671 million, mainly due to investment in a single EUR FRN ETF. Demand for Gilts (USD655 million), particularly those focused on maturities under five-years, picked up following the rise in yields after the 50bp hike from the Bank of England. Outflows were light and were led by convertible bonds, which was mainly driven by selling of AT1s following a steady recovery post the sale of Credit Suisse.”
Syms advises that, looking forward, economic weakness could pose a concern, as it could signal an opportunity to increase interest rate risk as it feels like central banks are currently at peak hawkishness. He also notes that credit spreads – and the relative value between spreads in different currencies with EUR credit are looking attractive relative to USD credit and that AT1 market performance will likely drive risk appetite.