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What’s driving the fixed income trend beyond interest rates?

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4 minute read

While interest rates have been largely attributed for record-high inflows to fixed income, an ETF investment strategist has highlighted another important part of the allocation puzzle.

It’s no secret that fixed income ETFs experienced significant growth amid interest rate hikes in 2023, however, other drivers helped propel its popularity, according to Global X’s David Tuckwell.

Appearing on an episode of the Relative Return podcast in January, he noted global equities took a backseat to fixed income ETFs and Australian ETFs in the last year.

“There’s a few reasons for the extraordinary popularity of fixed income ETFs in the past two years in particular. The first is the higher interest rate environment. Off the back of COVID, interest rates fell to zero, and if your fixed income ETFs are paying zero coupons because interest rates are so low, why would you want to buy them?” Mr Tuckwell said.

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“However, with inflation rising over the past few years, central banks around the world have jacked interest rates back up, meaning that fixed income ETFs pay a much more generous, much more generous yield now. That’s the first and the primary reason – they’re a better value proposition in this environment.”

According to Global X’s quarterly ETF market report, bond ETFs attracted $5.5 billion in net flows or some 37 per cent of the market’s net flows, compared to the prior years’ 25 per cent share.

Additionally, recent data by the Australian Securities Exchange (ASX) and Vanguard also found Australian bond ETFs recorded inflows of some $3.81 billion in 2023, a 37 per cent improvement year on year, while global bond ETFs received $1.5 billion in cash flow.

But fixed income did not flourish based on interest rates alone, with Mr Tuckwell suggesting financial advisers were a key driver of their popularity, especially among those around 60 years of age.

He explained: “As you can understand, when you’re in that demographic, income is very, very important to you. So, from a financial advisor’s perspective, and from their client’s perspective, bond ETFs and fixed income ETFs are now providing something very useful in a generous income stream.”

Looking ahead, however, monetary policy is expected to ease as the Reserve Bank of Australia closely monitors inflation data. The Consumer Price Index lifted 0.6 per cent during the December quarter, according to the Australian Bureau of Statistics, resulting in an annual increase of 4.1 per cent.

The 0.6 per cent increase was much lower than the 1.2 per cent rise in the September 2023 quarter and represented the smallest quarterly rise since the March 2021 quarter.

It also surpassed expectations, with the market agreeing on a likely 0.8 per cent lift.

With this in mind, it would come as no surprise that investors are trying to predict which ETFs would best suit the current environment.

For Mr Tuckwell, the most obvious opportunity in the ETF market is “US Treasuries”.

“If you believe like I do, that those rates will fall, then you’ve got to get the bonds while the rates are still high,” he said.

“And we’re seeing a lot of that for that matter. Over the past 12 months, over at Global X, our most popular ETF has been our US Treasury ETF. Its ASX code is USTB, and we’ve seen over half a billion dollars flow into it in the past 12 months. A lot of uptake [and] one of the most popular ETFs in the country over the past 12 months.”

What’s driving the fixed income trend beyond interest rates?

While interest rates have been largely attributed for record-high inflows to fixed income, an ETF investment strategist has highlighted another important part of the allocation puzzle.

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Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.

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