Industry Updates

Investors rotate into euro government bond ETFs as Ukraine conflict turns ECB dovish

Markets now pricing in a 0.20% hike by December

Theo Andrew

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Investors have piled into eurozone government bond ETFs over the past week as the European Central Bank (ECB) looks set to tighten monetary policy slower than expected following Russia’s invasion of the Ukraine.

The Lyxor EUR 2-10Y Inflation Expectations UCITS ETF (INFL) recorded $171m inflows over the week while the Xtrackers EUR Overnight Rate Swap UCITS ETF (DBXT) saw $106m inflows.

Elsewhere, the Amundi Prime Euro Govies UCITS ETF (PR1R) recorded $66m inflows while the SPDR Bloomberg Euro Government Bond UCITS ETF (SYBB) and the iShares JP Morgan EM Local Govt Bond UCITS ETF (SEML) saw $66m each.

Another Amundi product, the Lyxor Euro Government Bond 3-5Y (DR) UCITS ETF (MTB) posted $52m inflows and the Xtrackers Eurozone Government Bond 1-3 UCITS ETF (DBXP) recorded $49m inflows.

The traditionally dovish ECB first opened the door to rate hikes on 3 February in a bid to battle spiralling inflation across the continent which accelerated above expectations to 5.8% in February.

However, the ECB is expected to look through the increase given the increased economic uncertainty.

Germany’s 10-year bunds recorded its biggest daily fall since 2011 on 1 March turning negative for the first time in a month as ECB policymakers urged for a more cautious monetary policy following the Ukraine fallout.

Investors now anticipate a 0.20% interest rate increase by the ECB by December, with the first 0.10% hike expected in October.

This is down substantially from the market's previous predictions where it had priced in a 0.40% hike before the Russian invasion began in a bid to combat record inflation.

Jim Reid, head of global fundamental credit strategy at Deutsche Bank, said: “It is not a typical risk-off Italy being the best performer indicating it is more to do with a dramatic repricing of the ECB’s potential hawkishness.

“This has likely been exacerbated by positioning dynamics given the increasing expectation of hawkish central bank action.”

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