Inflation-linked bond ETFs had their first month of inflows after seven straight months of outflow, and ETFs backed by Japanese and US equities recorded strong inflows even though these markets are further along in their recovery than the EU and the UK, and likely have fewer easy gains to make. Commodities ETFs had net outflows last week, though there wasn’t much activity overall.
“Last week, Inflation-linked bond ETFs recorded net inflows after seven months of continuous redemptions, with no particular differentiation between geographical areas,” writes Societe Generale analyst Sebastien Lemaire. “This could come as a surprise given that mature economies do not face the same inflation risk. In the US and UK, the Central Banks wish to keep an easy monetary stance, despite upbeat macro data, which should push the inflation premium higher.”
EM ETF investors unconcerned by tapering
Tapering is expected to increase throughout the spring as US economic data continues to improve, which threatens emerging markets, especially those with high current account deficits, but apparently ETF investors aren’t concerned. Societe Generale doesn’t think the positive surprise is enough to warrant a rate hike in the near future (most still don’t expect such a hike until next year unless inflation starts to get out of hand), which may be part of the reason investors are not yet concerned about keeping their exposure to EM.
Yield spreads tightening in Europe
Spreads are tightening in Europe as the US recovery is expected to benefit the EU periphery more than tapering will harm it, while German government bond yields have been rising along with the US Treasury bonds and both saw net outflows last week. Of course, this yield compression comes in an environment of falling inflation (down to 2% annualized in the UK and 0.8% in the Eurozone) that some EU bears have worried could turn into deflation at some point this year.
“Investors have positioned for a yield compression between periphery and core government bonds in the Eurozone,” writes Lemaire, and yields may get squeezed even tighter in the coming months. “Our strategists see still room for spread compression, even though spreads are at their lowest levels in almost three years.”