European investors rotating out of bonds

Fixed Income sell-off across the European board

As fears of a new endemic emerged, investors dumped Fixed Income ETF assets for the second consecutive week. Fixed Income ETFs domiciled in Europe witnessed a huge sell-off registering USD$3 billion[1] net outflows for the week between May 16th and May 20th, compared to USD$1.25 billion net outflows in the prior week. Corporate Bond ETFs lost USD$4.5 million of assets only to be dwarfed by the USD$1.15 billion net outflows witnessed by Government Bond ETFs. Investment Grade Bond ETFs, after posting net inflows the previous week, netted USD$128 million of outflows. Meanwhile, High Yield Bond ETFs, continued their losing streak having recorded USD$176 million of outflows for the week.   

Chinese Yuan ETFs among outflow leaders 

European investors dumped USD$1 billion worth of Chinese Yuan denominated fixed income ETFs last week, bringing their holdings down to USD$9.4 billion and year-to-date net outflows to USD$5.38 billion. The rising interest rate environment, that we’re seeing across the United States and other developed countries, can have an erosional effect on holding higher yielding debt meaning investors can expect higher yields with relatively lower risk elsewhere. Moreover, total lockdowns across mainland China are also weighing on the Chinese national currency. Efforts to curb the spread of COVID-19 fueled concerns over the country’s economic outlook with the Yuan falling almost 5% vs the United States Dollar this year. This has resulted in a reduction of the value of principal and interest payments for foreign holders of Chinese debt. 

The rise in U.S. Treasury yields and weakening of the Chinese national currency caused by COVID-19 lockdowns have reduced appetite for Chinese debt and ramped up a sell-off by foreigners.

Consequently, European domiciled ETFs investing in Chinese Yuan denominated bonds aggregated USD$993 million in net outflows. Fixed Income ETFs with the highest outflows included iShares China CNY Govt Bond UCITS ETF (XAMS:CGBI)  losing USD$395 million, followed by iShares China CNY Bond UCITS ETF (CYBU) with net outflows of USD$256 million last week, and iShares China CNY Bond UCITS ETF (CYBA) with USD$249 million of outflows.  

Bottom 5 Bond ETFs last week

• iShares China CNY Govt Bond UCITS ETF (XAMS:CGBI): - USD$395 million
• Xtrackers II Eurozone Government Bond 5-7 UCITS ETF (X57E): - USD$306 million
• PIMCO US Dollar Short Maturity Source UCITS ETF (XLON:MINT): - USD$273
• iShares China CNY Bond UCITS ETF (CYBU): USD$256 million
• iShares China CNY Bond UCITS ETF (CYBA): USD$249 million

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[1] Fund flow data as of May 20th.

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