Monthly fixed income update

The benchmark 10-year US Treasury yield briefly dropped below 3.60% following the 50bp rate cut from the Fed, accompanied by a more dovish rate outlook that had been anticipated, before yields drifted higher in the second half of the month. However, with the Fed joining the ECB and Bank of England in starting to ease monetary policy - as the major central banks turn their focus to supporting economic growth rather than bringing down inflation - it is likely to be a generally positive environment for bond markets in coming months.

Cash management ETFs have been the strongest fixed income category for inflows so far this year, while US money market fund assets are sitting at record levels ($6.4Tn according to ICI Money Market Fund Assets as at 30 Sep 2024). With inverted government yield curves and relatively flat credit curves, the attractive level of yields available on cash and short-dated bonds has meant that, until now, there has been no need for investors to increase interest rate risk. However, as yields and therefore expected returns on cash decline now that central banks are cutting rates, investors are likely to start to increase duration by extending along the curve to lock in yields currently available in bond markets. In early August, USD investment grade credit ETFs experienced material inflows as spreads widened from relatively tight levels as Yen carry trades were unwound. Similarly, it is likely that the wall of cash will be put to work on any spikes in yield, now that the easing cycle has started.