Investors piled into fixed income ETFs during the first half of 2019 amid dampening rate rise expectations, recessionary fears and escalating trade tensions between the US and China.

According to data from Morningstar, fixed income ETFs saw a record $107bn inflows globally taking over assets under management to $776bn, the first time flows have crossed the $100bn mark in the asset class.

The previous highest inflows were in H2 2018 and H1 2017, which witnessed $66bn and $64bn inflows, respectively.

Tackling liquidity concerns in fixed income

Jose Garcia-Zarate (pictured), associate director, passive strategies, manager research, Europe, at Morningstar, said the flows were due to a “classic case of risk-off behaviour” as investors begin to become increasingly concerned about the arrival of “dark clouds”.

In particular, he pointed to the evermore dovish tone taken by central bankers since the start of this year has been a key driver.

At the end of last year, the Federal Reserve was signalling as many as four interest rate increases in 2019. However, the ongoing trade tensions between Washington and Beijing combined with a less rosy outlook for the global economy led the Fed to cut rates at its last Federal Open Market Committee (FOMC) meeting in July.

Meanwhile, the European Central Bank signalled plans to cut rates and take additional measures to stimulate the lacklustre eurozone economy.

At the press conference in July, outgoing ECB President Mario Draghi said “a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favourable and support the euro area expansion”.

Garcia Zarate commented: “At the time, the policy messages delivered by key central banks had taken on a dovish tone, and for many investors this was the signal to unwind positions in equity markets and seek refuge in less risky asset classes.”

He also highlighted the development of the ETF space for the asset class with an increasing number of products enabling investors to slice and dice the market in different ways.

For example, last month, Lyxor launched a steepening yield curve ETF, the first of its kind in Europe, that delivers positive returns when the two-year Treasury steepens against 10-year.

Fixed income ETPs passed a number of milestones in H1 including crashing through the $1trn barrier at the end of March.

Furthermore, in Europe, two iShares products have become the first fixed income ETFs to cross the $10bn barrier for the first time in May, the iShares Core € Corp Bond UCITS ETF (IEAC) and the iShares JP Morgan EM Local Govt Bond UCITS ETF (IEML).