Investors preferred government bonds last week

Capital flowed into higher-quality bonds

European fixed income ETFs attracted net inflows of USD$457 million for the first week of May (from May 02nd to May 06th) compared to USD$1.167 billion a week earlier. They gathered USD$11.4 billion of net inflows on a year-to-date basis. Investment grade fixed income ETFs were the primary beneficiaries. They received USD$761 million in net inflows last week and USD$15.2 billion since the beginning of the year. Conversely, high yield ETFs recorded outflows of USD$79 million, bringing year-to-date net outflows to USD$2.3 billion.

Rate hikes directing capital towards safer assets

The U.S. Federal Reserve's Chair Jerome Powell announced last Wednesday an additional 50 basis points rate hike to fight 40-year inflation. The Chair's comments reassured the central bank's commitment to price stability while acknowledging the hardships experienced by low-income businesses and families.

On the other side of the Atlantic, the Bank of England stepped up its efforts in its fight against inflation. The Monetary Policy Committee voted for a rate hike on Thursday and raised the key interest rate to its highest level in 13 years. Other central banks are expected to follow suit and embark on a tightening monetary policy as inflation eats investment returns and destabilizes global economies.

Investors flocking to government debt

Issuer data shows that European investors eschewed Corporate Debt ETFs for Treasury ETFs and Agency Bond ETFs. Treasury and Agency ETFs, tracking government and government agency debt, registered USD$663 million in net inflows, while Corporate Debt ETFs faced a wave of selling with outflows totalling USD$215 million last week. Out of the top 10 flow receivers, 8 were Government Bond ETFs, while two were Corporate Debt ETFs holding USD$743 million and USD$164 million of assets under management, respectively. Investors were looking to immunize their portfolios from interest rate changes. They flocked to ETFs with shorter duration (lower sensitivity to changes in interest rate) as 8 of the 10 top flow receivers were investing in the short to intermediate term.

Top 5 ETFs of last week:

• BNP PARIBAS EASY JPM ESG EMU GOVERNMENT BOND IG 3-5 Y (GEMU): USD$148 million
• iShares € Govt Bond 3-5yr UCITS ETF (IBGX): USD$94 million
• iShares $ TIPS UCITS ETF (ITPS): USD$90 million
• iShares $ Treasury Bond 1-3yr UCITS ETF (IBTMXX): USD$88 million
• iShares Core € Corp Bond UCITS ETF (IEAC): USD$88 million

Fund flows data as of May 06th, 2022.