With net inflows of USD1.9 billion, September saw the slowest pace for fixed income ETFs since February, according to Invesco. The firm writes that fixed income ETFs account for USD50.9 billion net new assets (NNA) in 2023, representing 46 per cent of net inflows.
The firm comments that the ‘risk off’ sentiment appears prudent given the market outlook, as it looks that growth will slow and inflation will fall back towards target.
Paul Syms, Head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, comments: “Fixed income markets generally performed poorly in September as economic data indicated a more buoyant picture for the global economy than had been anticipated, while central bank commentary was broadly hawkish on rates. This combination caused yields to rise across global bond markets with the benchmark 10-year US Treasury yield rising by 46bp over the month to end September at a new cycle high of 4.57 per cent.
“Investment grade credit spreads were little changed over the month, with rising government bond yields the driver behind the negative returns during September. Lower rated Euro-denominated debt was the main exception over the month as spreads tightened which, combined with the higher level of yield offered, led to mildly positive returns over the month.
“Net inflows into fixed income ETFs slowed further in September to USD1.9 billion, the slowest pace since February as investors became more cautious about the outlook for yields. However, with USD50.9 billion NNA so far this year, fixed income ETFs represent 46 per cent of net inflows, well above their 24 per cent market share by assets under management.
“Fixed income ETF flows continued to indicate a broadly risk-off sentiment from investors with government bonds and cash management ETFs seeing the strongest inflows, while high yield and emerging market debt experienced outflows. EUR government ETFs (USD2.0 billion) led inflows in September followed by cash management (USD0.8 billion) and US Treasuries (USD0.5 billion). A single large inflow pushed Green Bond ETFs (USD0.2 billion) into fourth spot while a new category of fixed maturity ETFs (USD0.2 billion) also saw strong inflows. EM Government Bond ETFs (-USD1.1 billion) led the outflows, with additional outflows in EM space from China Bond ETFs (-USD0.2 billion). High yield (-USD0.6 billion) also suffered in the risk-off sentiment.
“The risk off sentiment appears prudent given the outlook. While bonds performed poorly in September, yields have risen to even more attractive levels and, although recent economic data has been relatively buoyant, the longer-term outlook is that growth does appear to be slowing and inflation is falling back towards target. That means there will be less pressure on central banks to tighten policy further, in the months ahead. Although bonds and equities have been more positively correlated recently, once rates do peak, the previously seen low to negative correlation between government bonds and equities is likely to return which would make high quality bonds a useful hedge against equity market volatility once more.”
