European sovereign bond funds pull in record $15 billion in second quarter

Global investors poured a record amount of money into European sovereign bond funds in the second quarter of the year, lured in by high yields and the prospect of interest rate cuts by the European Central Bank next year.

European sovereign bond funds attracted $15.15 billion of inflows in the April to June period, according to financial data provider EPFR, up from $10.44 billion in the previous quarter, which was then a record.

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Global government bond yields have shot higher as central banks have hiked interest rates in an effort to tame a surge in inflation, making fixed income more attractive after years of low returns.

The yield on Germany’s 10-year government bond , the euro zone’s benchmark, which traded around 2.44% on Friday, was around -0.3% just two years ago. The Italian equivalent is around 4.14%.

“It’s natural to see people moving into bonds when people in general expect to see inflation decline,” said Emmanouil Karimalis, macro rates strategist at UBS.

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“We’ve got lots of indicators that point to negative growth, and also we are closer to the end of the hiking cycle.”

Investors’ big wagers on European sovereign debt have been painful so far this year. Euro zone inflation has proven sticky and the ECB has hiked interest rates much more than expected, to 3.5%, causing yields to rise and bond prices to fall.

However, many big asset managers are sticking to their bets that yields will eventually fall and prices will rise as the economy slows and rate hikes stop.

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They received a boost in the last two trading sessions as global bond yields tumbled in the wake of data that showed U.S. inflation cooled sharply in June.

“We remain in our long-duration camp, despite the decent moves over last few days,” said Mohit Kumar, chief strategist for Europe at lender Jefferies, who recommends buying 10-year government bonds.

“(The) weaker economic picture argues for a long-duration position over the medium term.”

Exchange-traded funds have been a particularly popular way for investors to gain access to European bond markets.

BlackRock data shows that the first half of 2023 was a record for flows into European fixed income exchange-traded funds, with around $36 billion pouring in.

The asset manager said clients were keener on the riskier parts of the bond market in the first quarter of the year, but took a “defensive tilt” in the second half towards sovereign debt and high-grade corporate bonds.

Flows into European investment grade corporate bond funds were $19.19 billion in the second quarter, EPFR’s data shows, the highest since the third quarter of 2021.

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