Looking across ETF fixed income markets

For ETF fixed income investors, 2024 has been generally quite supportive: Most companies have managed to weather a backdrop of macro uncertainty; investors have continued to have access to attractive levels of yield; inflation, while sticky, has been moving in the right direction.  Meanwhile, the volatility experienced at the start of August proved to be a storm in a teacup. 

Now, with the expectations of further rate cuts and less promising economic cycles still a reality, what is the outlook for fixed income ETFs?

For European credit, we have not seen yields at current levels for over ten years, even though the fundamentals of some of these issuers are very solid and resilient. However, if we look at the credit spread or credit premium, the situation is a little different. This is because we have seen very significant tightening of these credit spreads over the last twelve or so months. Even after the recent volatility pushed spreads wider in early August, the investment grade (IG) market offers an average asset swap spread just in line with the 10Y historical average, while the high yield (HY) is even slightly tighter vs. the 10Y historical average¹ .

While the outlook suggests we may be entering a cycle that is less promising, it continues to be a strong market with almost € 430 billion issued YTD^{2 .} These are huge amounts in the Euro Credit market across all sectors - even in the real estate sector, which was a bit shunned last year. Real estate issuers are now able to issue across all seniorities. So, whether it is senior debt, subordinated debt, perpetual debt or the famous AT1, we have a very dynamic market.

There are also a lot of US issuers coming to take advantage of the buoyant environment in the European market. Overall, it's a very healthy market that's functioning well and therefore liquidity conditions are extremely good.

On the other side of the Atlantic, there is a similar story of strong fundamentals and attractive returns. On a YTD basis, the US HY market has continued to outperform equity indices like the Russell 2000, as well as other parts of the fixed income market.³

We expect the US economy to cool but without significant declines, partly helped by inflation moving back to the 2% target. This should enable the Federal Reserve (Fed) to begin cutting rates and thus support companies through a slowdown in rising interest expense.

Looking at the rest of 2024, central banks and their monetary policies are an obvious factor that could influence markets. This is particularly true in the US where recent macroeconomic data has been confusing and contradictory leading to concerns that the Fed has made a mistake keeping rates too high for a long time. For now, we maintain our expectations for 25bps rate cut in both September and December. There are also elections that could impact markets and we have already seen this volatility through the election in France. The next big one is the US which is likely to add a little bit of volatility.