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BlackRock: Inflation concerns and sustainability driving bond ETF flows in EMEA

Brett Olson, Head of iShares Fixed Income EMEA, explores the top themes influencing how clients are thinking about their fixed income portfolios.

 

The key themes affecting how clients are thinking about their fixed income portfolios are as follows:

  1. Inflation and rate volatility top of mind
  2. Sustainability inflows contrast broader fixed income outflows
  3. High yield and emerging markets in the spotlight amid search for yield

 

Are we in a rising rate environment?

  • This is the key question on the lips of many investors looking to shore up their fixed income exposures against the potential for inflation and rate volatility.
  • Looking beyond the transitory nature of the current inflation surge linked to the reopening dynamic, the BlackRock Investment Institute (BII) points to inflation building steadily over the medium-term as easy monetary policy allows the U.S. economy to run hot.
  • Bond ETF flow data show investors are moving their allocations to use inflation-linked bonds with YTD inflows of $3.0bn at 31 May 2021, vs. $4.2bn for the entire of 2020*, as well as short duration corporate and government bonds to minimise rate volatility.
  • The liquid, flexible nature of fixed income ETFs is enabling investors to remain nimble and stay adaptable to changing market conditions.

 

Investors are committed to their sustainability journey

  • Sustainable flows across all major fixed income asset classes continued to be positive with total flows into fixed income ESG ETFs coming up to $12.6bn as at end of 31 May 2021, mainly driven by investment grade credit, which accounted for 73% of this total.
  • Sustainable fixed income ETF flows are by far exceeding industry inflows into traditional, non-ESG exposures year-to-date – which stood up to only about $3.3bn as of end 31 May 2021.
  • Investors increasingly want to understand the impact of sustainability on their fixed income sleeve. Despite growing investor caution on fixed income as an asset class in recent months, the trend of switching out of traditional or non-ESG funds and actively transitioning into sustainable exposures is accelerating.

 

Fig.1: UCITS Fixed Income Sustainable ETF flows

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