Fixed-Income ETFs Set Records in 2023, Continue Momentum with Strong December Inflows

Fixed-income ETFs continued their strong performance in December, attracting net inflows of $5.1 billion, according to Invesco. This capped off a remarkable year for the sector, with fixed-income ETFs recording a record-breaking $68.2 billion in net new assets (NNA) in 2023. The focus of investor demand throughout the year was on higher-quality fixed income, driven by sufficient yields that alleviated the need to take on additional credit risk. With expectations of interest rate cuts in the next 12 months, 2024 is poised to see a continuation of robust inflows into fixed-income ETFs.

Paul Syms, Head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, highlighted the significant rally in bond markets during December. He noted, "Bond markets continued to rally in December, once again providing positive returns across the fixed income spectrum." The Bloomberg Global Aggregate Index posted its strongest two-month return in 30 years, gaining 5.0% in November and 4.2% in December. This rally was fueled by weaker economic data and a more dovish outlook from the Federal Reserve, which adjusted its rate expectations and inflation projections.

The turnaround in the bond market translated into positive fixed-income returns for the entire calendar year of 2023. Notable recoveries were observed in various markets, including U.S. Treasuries and USD-denominated investment-grade credit, both ending the year with substantial gains.

Looking ahead, fixed-income ETFs are expected to remain popular among investors aiming to secure longer-term yields ahead of potential interest rate cuts. In 2023, leading categories for inflows included EUR government bonds, EUR and USD investment-grade credit, and fixed maturity bonds. Conversely, categories such as U.S. Treasuries, inflation-linked, and China bonds experienced outflows.

Paul Syms emphasized that, while fixed-income markets have experienced a robust rally driven by the end of the hiking cycle and the Fed's dovish stance, there might be a need for a pause due to the strength of the rally. However, the anticipated reduction in interest rates in the coming year is likely to sustain high demand for fixed income as investors seek to capitalize on favorable yields.

By fLEXI tEAM