Powell's comments move fixed income markets

According to Trackinsight’s fund flow data, Europe-listed fixed income ETFs attracted a total of USD$335 million[1] of investor capital between August 22nd - 26th, marking a sixth consecutive week of net inflows, albeit the second week of negative average returns. On Friday, August 26th the Fed’s Chairman Jerome Powell was unequivocal with regard to price stability and fighting inflation. He was quoted saying that “The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal,” stating that without price stability, the economy will not achieve a sustained period of strong labor market conditions that benefit all. 

Powell’s hawkish comments that restoring price stability will likely require maintaining a restrictive policy stance for some time, even at the expense of slowing economic growth, reverberated across the markets with the S&P 500 falling from 4,197.16 to 4,057.99, a 3.32% drop and the largest for several months. On the fixed income side, U.S. Treasuries rose in anticipation of ever-increasing interest rates and it’s worth noting that the 2-year U.S. Treasury jumped more than the 10-yearTreasuries. Government Bond ETFs reacted positively to the news attracting USD$350 million of net inflows, while in sharp contrast corporate debt ETFs lost US$195 million over the week across all credit ratings, the largest outflows in the fixed income universe. 

When sliced from a credit rating perspective, investment grade bond ETFs took the lion’s share of inflows, having brought in USD$850 million of investor cash. In comparison, their high-yield counterparts registered almost USD$118 million in net outflows for the same period. 

The iShares Core € Govt Bond UCITS ETF (IEGA) was amongst last week’s flow leaders. The fund attracted USD$85 million of net inflows while holding USD$3.8 billion of assets under management. The fund seeks to track the performance of an index composed of Eurozone investment-grade government bonds. 

In addition, The Amundi Index Euro Corporate SRI 0-3 Y UCITS ETF (ECRP3) appealed to European investors for the fourth consecutive week. It attracted USD$65 million of investor capital dwarfing the previous week’s USD$0.5 million. ECRP3 enables investors to gain exposure to a portfolio of investment grade, euro-denominated bonds, which excludes issuers that are involved in alcohol, tobacco, gambling, military weapons, nuclear power, adult entertainment, civilian firearms, genetically modified organisms, thermal coal, and oil sands. All issuers must have minimum MSCI ESG ratings of BBB. 

On the other side of the coin, bond ETFs that witnessed significant outflows included the iShares Core € Corp Bond UCITS ETF (IEAC) and SPDR Bloomberg Emerging Markets Local Bond UCITS ETF (EMDD), losing USD$300 million and USD$113 million, respectively.

Top 5 Fixed Income flow receivers last week:

• iShares € Corp Bond ESG UCITS ETF (SUA0): USD$144 million
• iShares Core € Govt Bond UCITS ETF (IEGA): USD$85 million
• Amundi Index Euro Corporate SRI 0-3 Y UCITS ETF (ECRP3): USD$65 million
• Vanguard EUR Eurozone Government Bond UCITS ETF (VETA): USD$65 million
• Amundi Index Euro Corporate SRI UCITS ETF (ECRP): USD$65 million

 [1] Fund flow Data as of August 26th, 2022.