Investors tapped bond ETFs in October due to rate expectations

Expectations of lower interest rates drove inflows into bond ETFs during October – a month that otherwise saw net redemptions in bond funds, as well as outflows for the broader long-term funds industry.

Mutual funds and ETFs combined meant bond funds in October saw outflows of €2.4 billion, according to data from LSEG Lipper.

Equity funds saw deeper outflows, of €19.5 billion overall – although investors did buy US equity funds predominantly through ETFs, the data shows.

Bond products have had a strong run of inflows this year. At October 31, they rated as the best-selling product type for 2023, according to the figures released this week. Target maturity bond funds – accessed overwhelmingly through mutual funds – saw comparatively strong inflows during the month, estimated at €5.8 billion.

Some investors think there might be room for decreasing interest rates still in 2023, which might be reflected by the continued estimated inflows in bond ETFs during October, said Detlef Glow, head of Emea research at LSEG Lipper, albeit he said this view was under scrutiny.

Broad investor caution was reflected in the flow data in October, with strong sales seen in money market funds.

Further trends identified were that, overall, the promoters of mutual funds in Europe faced outflows of €19 billion in October, while the promoters of ETFs saw estimated net inflows €15.2 billion. The data shows that investors particularly targeted US equities through ETFs.

Long-term products – generally meaning equity and bonds – saw €45 billion of outflows in October.

JPMorgan was the best-selling fund promoter in Europe for October, with €7.1 billion.

Glow, author of the firm’s monthly European Fund Flow Report, highlighted that the European funds industry witnessed overall outflows over the course of October 2023 in a continuing unstable market environment. Equity indices faced a drawback over the course of the month, which contributed to cautious sentiment, he said. 

“More generally, the market sentiment in October was also driven by hopes that central banks—especially the US Federal Reserve—may have reached the last phase of its fight against high and further increasing inflation rates and may, therefore, start to keep interest rates at least stable quite soon. Some investors already think there might be room for decreasing interest rates later this year, which might be reflected by the estimated inflows in bond ETFs.”

But Glow added: “Nevertheless, these estimates are under scrutiny since the Fed seems to be further in a hawkish mode, as the rate outlook still includes potentially an additional rate hike this year and fewer rate cuts in 2024.”

© 2023 funds europe

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