Fixed income ETFs in Europe have seen record annual inflows over the past 12 months amid investor positioning for pivots in central bank policy.
According to data from Invesco, bond ETFs account for $63bn of net new assets in 2023, surpassing the $62bn inflows seen in 2019.
After fixed income booked one of its worst years of performance since World War II in 2022, the swing back in favour of the asset class has seen investors turn to ETFs to implement the ‘bonds are back’ trade.
In fact, fixed income ETFs boasted $51.6bn inflows in the first three quarters of this year, comprising 49% of all ETF inflows and punching considerably above their 23% market share of ETF assets under management (AUM) in Europe.
This momentum shift has helped buoy the ETF wrapper, which has a $195bn lead in inflows versus mutual funds in Europe this year, as at the start of December.
In Q4, fixed income ETFs have actually gathered pace as markets price in the end of interest rate hikes by the Federal Reserve and other policymakers.
November saw $7.1bn flow into fixed income ETFs, with $3.4bn into euro investment grade credit and $2.3bn into US Treasury ETFs.
Paul Syms, head of EMEA ETF fixed income and commodity product management at Invesco, noted the Bloomberg Global Aggregate index posted a 5% return for November, marking its second-strong month of gains in the last 30 years and second only to December 2008, as the Fed responded to the collapse of Lehman Brothers.
Although some investors had been stung by continued bond underperformance through much of this year, weaker economic data and less hawkish messaging by the Fed signal a more favourable year may be on the horizon for the asset class.
“While fixed income markets performed strongly in November, and returns are unlikely to be as strong going forward, the end of the hiking cycle is likely to allow bond markets to continue to perform well in the months ahead,” Syms continued.
“Economic data indicated that the global economy is slowing and inflation is trending back to target following the aggressive tightening of monetary policy over the last two years. Additionally, central banks now appear to be more willing to allow the impact of previous hikes to feed through to the economy over time to further reduce inflation rather than hiking further and choking off growth.
“This is providing some comfort that 2024 will see a soft landing with slower growth rather than a deep recession, which is also driving a broadly risk-on tone to markets.
Similarly, Arun Sai, senior multi-asset strategist at Pictet Asset Management, said a “bond revival beckons in 2024” as conditions become “less fraught”.
“According to our forecasts, bonds should deliver above-average gains in 2024, thanks to higher coupon income, weaker nominal GDP growth and a gradual shift in central bank monetary policies towards modest easing.
“We also see inflation in the developed world falling to 3.0% from this year’s 4.7%, allowing the Fed and the European Central Bank to start cutting interest rates by mid-2024, albeit by less than the market currently discounts.”
As seen with the arrival of target maturity bond ETFs in Europe this year from BlackRock and DWS, flows and asset class momentum drive product development. If momentum remains, 2024 promises to be a year of strong flows and new launches for fixed income ETFs.