Industry Updates

ETF investors show hunt for fixed income yield is stronger than ever

Three bond ETFs have seen a combined $2.5bn inflows YTD

Jamie Gordon

a few paper money on a table

The hunt for yield continued last week for fixed income investors in Europe with China government debt, CoCo bonds and emerging market debt ETFs seeing inflows.

According to data from Ultumus, among the most popular products in the week to 16 April was the iShares China CNY Bond UCITS ETF (CNYB) which collected $211m inflows.

With $9.9bn assets under management (AUM), CNYB has become a haven for fixed income investors seeking out steadier yields offered by Chinese government debt versus western counterparts.

China 10-year yields have stayed within a range of roughly 3.1% to 3.3% this year. Meanwhile, US 10-year Treasuries yields have fluctuated between a far wider range of 0.9% and more than 1.7%.

Another non-western-focused ETF doing well was the iShares J.P. Morgan $ EM Bond UCITS ETF (IEMB). Already claiming the largest dollar-denominated emerging market (EM) debt product, BlackRock’s euro-denominated equivalent launched at the start of April and collected $152m last week.

Elsewhere, the Invesco AT1 Capital Bond UCITS ETF (AT1) was in demand last week booking $122m inflows. Having broken through the $1bn AUM mark in February, AT1 has continued to $1.4bn in April as investors seek yield from less traditional strategies.

AT1 tracks a basket of contingent convertible (CoCo) bonds which differ from other high-risk fixed income vehicles in that they have a specific strike price. Once an issuer’s capital drops below a pre-determined level, the loan is liquidated and converted into equity to be held by the lender.

This offers the investor an added level of comfort when lending to higher-risk issuers, with a safety mechanism acting as a get-out as long as the initial issuer does not go bust.

Finally, the Lyxor Core Euro Government Inflation-Linked Bond UCITS ETF (MTI) added $82m in the week to 16 April as those not wanting to abandon western government debt searched for an inflation hedge.

Though some are not convinced by the inflation narrative, respective announcements by the Federal Open Market Committee and Bank of England on keeping interest rates frozen prompted many investors to keep inflation hedges in play for the foreseeable.

Rising German bund yields and a European bond sell-off on Monday prompted US Treasuries to follow suit. Ahead of the next meeting of the European Central Bank of Thursday, Saxo Bank CIO Steen Jakobsen said Europe’s monetary regulator needs to reiterate its commitment to keeping bond yields steady.

“The improving European economic outlook might mean higher inflation, and higher European sovereign yields,” Jakobsen said. “Strategists from the street highlight there is a risk on Thursday that the ECB will disappoint because the central bank might not be as committed to keeping bond yields in check in light of the improving economic backdrop.”

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