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Money rushed back into investment grade corporate bond exchange-traded funds in July, with flows supported by ‘large’ purchases of European-focused vehicles, a sign of improvement of feeling.
Fixed income ETF purchases jumped to $32.5 billion in July from $3.2 billion in June, largely due to a recovery in credit or bond ETF purchases business losses, which amounted to $13.8 billion, more than recouping the $9.9 billion lost in outflows in June, according to BlackRock’s monthly global flow data.
Investment-grade credit vehicles accounted for the lion’s share of inflows, with $9.9 billion in July. Europe-focused investment-grade ETFs stood out, with the $2.2 billion in net new funds they attracted in July, the highest monthly inflow since April 2020, when markets started to recover from the initial pandemic shock.
“The first half of the year has seen European corporate credit become increasingly attractive relative to rates [government bonds] and equities,” said MJ Lytle, managing director of Tabula Investment Management, a bond ETF specialist.
He said yields rose in the first half, from less than 1% to over 3.5% for European investment-grade bonds and from around 3% to almost 8% for European fixed-income paper. high yield. When bond yields rise, prices fall.
“European high yield has traded at levels not seen since the global financial crisis, with the July peak above 93% of all readings since the end of 2009,” Lytle said. “July’s inflows into European corporate credit ETFs suggest a tipping point in terms of investor sentiment as investors look to capitalize on these higher yields.”
Karim Chedid, head of investment strategy for BlackRock’s iShares ETF arm in the Emea region, also noted the price appeal. “Investors might have an opinion on the cross-sector allocation because credit looks cheaper than equities,” Chedid said. But he added: “Credit isn’t cheap, it’s just cheaper than before, so that’s a sign that investors are seeing value.”
However, BlackRock noted that the reversal was a continuation of the “mismatched flows” that have been trending this year.
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, agreed, saying fundamentals haven’t changed much.
“Looking at the flows of European-domiciled Euro-denominated Investment Grade ETFs, I can see that there have been net inflows one month and outflows the next throughout this year.”
However, Todd Rosenbluth, head of research at VettaFi, said investors had been encouraged by indications that the US Federal Reserve was determined to fight inflation.
The Fed raised its benchmark policy rate by 0.75 percentage points for the second month in a row on July 27.
“As investors gained confidence, the US Federal Reserve had a better handle on mitigating the impact of inflation. [and] investors around the world were willing to take credit risk. Investors have gone from ultra short [duration] bond ETFs to those with higher yields,” Rosenbluth said.
He said ultra-short-duration ETFs, such as SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and iShares 1-3 Year Treasury Bond ETF (SHY), which hold highly low interest rate risk, had seen strong outflows in July.
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