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Fixed income ETFs attract $8.3 billion in January amid peak rates: Invesco

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Fixed income ETFs attracted USD8.3 billion in net new assets (NNA) in January, the highest monthly figure since July 2023, Invesco writes. While pace is likely to slow, 2024 is set to be a strong year for fixed income ETFs as rates have likely peaked in developed markets, the firm says, adding that EUR IG credit was strongest category for inflows in January, followed by high yield.

Paul Syms, Head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, comments: “Following the very strong performance in the last two months of 2023, the bond market rally stalled in January. Central bank rhetoric indicated that they felt markets had gone too far by markets pricing amongst imminent easing of monetary policy and pushed back on expectations for the timing of the first-rate cuts. However, while bond yields rose for most of January, they bounced towards the end of the month, helped by US inflation data continuing to trend towards target.

“While January is traditionally a heavy month for supply, 2024 set new records. In Europe alone, primary issuance had topped EUR300 billion a couple of days before month end, beating last year’s January total of EUR293 billion, according to Bloomberg. 

“But, while the volume of supply also kept pressure on yields, it was met with incredibly strong demand. Bids for new issues in Europe had topped EUR1 trillion by the middle of the month, around 10 days earlier than the previous record set is 2021. 

“US investment grade credit markets also saw record supply of around USD200 billion. With rates likely to fall during the coming year, and US and European investors sitting on record levels of cash, demand for new issues is likely to remain strong.” 

Fixed income ETFs see strongest inflows since July 2023

“Fixed income ETFs saw strong inflows in January with USD8.3 billion NNA being the best month since last July, although not quite as strong as the USD9.4  billion seen last January. While net inflows into fixed income ETFs are unlikely to continue at January’s pace going forward, 2024 is likely to be a strong year for fixed income ETFs now that rates have peaked in most developed markets and with record levels of cash waiting to be put to work.

“EUR investment grade credit (USD2.9 billion) was the strongest category for inflows in January. High yield (USD1.3 billion) also experienced high demand, with inflows going almost entirely into EUR-denominated ETFs. Cash Management (USD1.0 billion), US Treasuries (USD0.9 billion), Inflation (USD0.7 billion) and Aggregate bond ETFs (USD0.5 billion) also saw high levels of net inflows. Flows into Fixed Term ETFs (USD0.4 billion) remained strong, taking AUM for this relatively new category above USD2.5 billion. In a month of high demand for fixed income across the board, no single category saw net outflows above USD100m.

“As appeared likely, following the rally into year-end, fixed income markets stalled in January. Although demand remained high, the combination of less dovish central banks and high supply put upward pressure on yields. However, the backdrop for fixed income remains supportive with interest rates likely to start coming down in the middle of the year. It therefore seems likely that investors will see pull backs as opportunities to put cash to work in bond markets, and increasing duration to lock in yields before central banks start easing policy.”

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