Monthly fixed income update - June 2024
Asset Class Returns & EMEA Fixed Income ETF Flows
While June was broadly positive for fixed income, returns were muted as markets gave back some earlier gains as credit spreads widened while risk free rates sold off into month end. Bond markets remain highly focused on economic data releases providing better guidance on the path of interest rates in coming months. June also saw a resurgence in political risks with President Macron calling a snap election in France, the UK approaching polling day in its general election, and in the US, the first televised debate between Biden and Trump ahead of the presidential election later in the year.
Source: Bloomberg, Invesco as at 28 Jun 2024
Net flows into fixed income ETFs slowed to $3.5bn in June, half the pace that had been seen in May, with year-to-date net new assets (NNA) now standing at $28.3bn. Once again, it was ‘safe-haven’ asset classes of cash management and government bonds that were favoured with increasing political risk being the main driver of widening credit spreads over the month. Cash management ($1.1bn) was the leading category for net inflows in June, followed by EUR government bonds ($0.8bn) and US Treasuries ($0.6bn). Fixed maturity ETFs ($0.6bn) continued to see solid demand, potentially due to investors seeking to lock in yield levels currently available ahead of anticipated rate cuts. EUR investment grade credit ($0.4bn) experienced strong inflows early in the month following the rate cut from the ECB followed by heavy selling in the second half of the month following the announcement of a snap election in France. Meanwhile, EM Governments ($0.3bn) bucked the recent trend of outflows as buyers returned to hard currency debt. Outflows were relatively light with only high yield (-$0.7bn) seeing material sales in June.
Although yields across fixed income broadly remained within the recent trading range in June, heightened political risks reminded fixed income investors that they cannot afford to be complacent with their bond market allocation. Credit spreads widened during the month but remain tight relative to historic averages. However, it was eurozone government bonds that were in the spotlight, initially due to the ECB cutting rates early in the month, but then following the surprise announcement of a snap election in France. This caused the spread on French government debt over Germany to widen sharply and put pressure on peripheral eurozone government bonds. While this has presented an opportunity to switch from core to peripheral eurozone government debt, plenty of political uncertainty remains that could impact bond markets. Therefore, with core government bond yields at the higher end of the trading range and credit spreads still at relatively tight levels based on current valuations, interest rate risk continues to appear favourable relative to credit risk.
Source: Bloomberg, Invesco, as at 28 Jun 2024
Government Bonds
Although the ECB cut rates early in the month for the first time in this cycle, and ahead of the Federal Reserve, it had little impact on bond markets having been widely signalled ahead of time. More importantly, however, was US economic data as markets look for increased certainty about the timing of the first rates cuts in the US. A strong employment report early in the month caused the bond market rally to stall and yields to rise. This was followed a few days later by an inflation print that was below market expectations, driving yields lower once more, even though the Fed pushed back their expectation for rates cuts this year in their updated Summary of Economic Projections.
But, from the middle of the month, it was political risk that took centre stage. The main shock came from France. After his party performed poorly in the EU parliamentary elections, President Macron dissolved parliament and called for legislative elections in France. Concerns that the right-wing National Rally would receive a much higher share of the vote caused spreads on French government bonds over their German counterparts to widen, and impacted peripheral eurozone government debt.
Meanwhile, in the US, the first presidential debate between Biden and Trump raised some concerns around whether Biden will be the Democrat candidate in November. This heightened uncertainty, along with lack of imminent easing of monetary policy, caused government bonds to give back some of their earlier gains into month end.
Source: Bloomberg, Invesco as at 28 Jun 2024
Keep an eye on…election results in the UK and France, and the presidential race in the US.
Investment Grade Credit
Political events also impacted credit spreads during June. Having been trading at relatively tight levels, investment grade credit spreads had started to drift wider early in the month. However, the announcement of the French elections in the middle of the month caused spreads to widen further, particularly on EUR-denominated debt. Indeed, the increased political risk had a negative impact on EUR-denominated risk assets in general, with European equity indices generally ending the month lower while US indices such as the S&P 500 and Nasdaq made further gains in June. Over the month, GBP and USD-denominated investment grade credit spreads widened by 8bp and 9bp respectively, while European credit spreads widened by 12bp.
Source: Bloomberg, Invesco as at 28 Jun 2024
Keep an eye on…political risks and economic data which could cause spreads to widen further.
High Yield and Subordinated Credit
Although spreads ended the month wider across the board for lower rated credit, there were differing fortunes for USD and EUR markets. USD-denominated high yield spreads were only 1bp wider by month end as the political situation in Europe had little effect. The impact on USD-denominated AT1 spreads, which widened by 12bp over the month, was higher due to its focus on the European regulated banks. But it was EUR-denominated markets that were impacted the most. Euro corporate hybrid spreads widened by 22bp while EUR-denominated high yield ended the month 38bp wider.
Source: Bloomberg, Invesco as at 28 Jun 2024
Keep an eye on…French election results to determine the near-term direction of spreads.
Investment risks
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The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. All figures in USD
