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Risk off’ sentiment makes August a quiet month for fixed income ETFs: Invesco

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With net inflows of USD3.6 billion, August saw the lowest monthly new net assets (NNA) since February, says Paul Syms, Head of EMEA ETF Fixed Income and Commodity Product Management, Invesco, adding that the ‘risk off’ sentiment appears prudent due to prevailing market levels and recent economic data.

Fixed income ETFs have now attracted USD49.9 billion of NNA in 2023. Syms comments: “Although fixed income ETFs flows were typically low during August and, by month end, returns for most fixed income asset classes were close to flat, there was a fair amount of market movement during the month. Government bonds sold off into mid-August with the benchmark 10-year Treasury yield hitting a new cycle high of 4.36 per cent, 40bps higher than at the end of July. But sentiment changed towards the end of the month as softer data signalled that previous rate hikes are having an impact on the economy which caused bond markets to rally.

“While yields on European government bonds were little changed by month end, US Treasury yields ended the month higher than at the end of July and causing slightly negative returns for August. Credit spreads were also wider over the month, mainly due to concerns about the economic outlook.

“Fixed income ETFs had a quiet month with net inflows of USD3.6 billion, the lowest monthly NNA since February. Even so, net inflows into fixed income ETFs remain very strong for the year at USD49.9 billion. August flows indicated a risk off sentiment, with government bonds and cash management ETFs taking the top four places for the month. US Treasuries (USD2.1 billion) led, followed by EUR government bonds (USD1.8 billion) with Gilts (USD0.5 billion) in fourth spot. Cash management ETFs were sandwiched between EUR governments and Gilts in third place with USD1.6bn NNA. In keeping with the risk off theme, outflows were seen from EM Government bonds (-USD0.8 billion) and High Yield (-USD0.6 billion). It’s worth noting that while EUR IG ETFs remain the strongest category for inflows so far this year (USD10.3 billion), they experienced heavy outflows (-USD0.7 billion) in August.

“The ‘risk off’ sentiment appears prudent given prevailing market levels and recent economic data. With a few specific exceptions, equity markets have performed well this year and, while investors still want to participate in the potential upside for risk assets, it’s worth hedging some of that risk with asset classes considered to be safe havens, such as developed market government bonds. With yields close to cycle highs and the rate hiking cycle close to the peak, high quality bond markets could provide healthy returns going forward, particularly if the economic landing isn’t as soft as central banks are hoping.”

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