It was the week bond ETFs finally came back. Weak US jobs data sent equity markets in a spin earlier this week, resurrecting the narrative that has underwhelmed for much of 2024.
While markets have calmed somewhat, expectations that the US Federal Reserve could bring interest rates down from 5.25% to 4% by the end of the year have prompted ETF investors to take advantage.
Nathan Sweeney, CIO multi-asset at Marlborough, said: “Our central case is that falling inflation leads to continued interest-rate cuts and a modest and not meaningful slowdown in growth. This paves the way for government bonds to take the spotlight from cash.
“We are overweight government bonds, as they are now providing an attractive level of income for investors.”
Highlighting this, investors piled into fixed income ETFs in July.
Globally, bond ETFs posted record monthly inflows of $60.5bn, according to BlackRock, and also hit record figures in Europe with rates ETFs and investment grade ETFs leading the flows table.
Flows were broad-based, with investors seeking opportunity across the fixed income spectrum, while duration was also spread.
The iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) recorded $1bn inflow in July, the highest of all ETFs in Europe.
Duration is still a key question for investors. In a note to analysts, JP Morgan said it was forced to “recalibrate its duration outlook” following the volatility, taking a “tactical profit” in its outright long-duration exposure.
Investors also saw opportunities in high-yield credit ETFs as spreads widened to their highest point since November 2023, piling $600m into the product class.
Commenting, Wayne Nutland, multi-asset investment manager at Skerritts, said: “At this stage, we are not making material changes to our allocations, but are reducing underweight positions in high-yield credit given spread widening over recent days.”
The iShares € High Yield Corp Bond UCITS ETF (IHYG) recorded $442m alone in July.
Chris Metcalfe, IBOSS CIO at Kingswood Group, added: “If market volatility continues, we might see a shift back into bonds, as they are currently acting as a safe haven. This trend is likely to persist if equities remain unstable, providing a more secure option for investors during these turbulent times.”
While markets have stabilised, those believing more volatility is on the horizon will continue to look to bonds over cash and equities as a safe haven.
