Quarterly market review: U.S. Equity and Bonds markets in the red

March Madness is a perfect title for global markets as we close the first chapter of 2022. A Russia-Ukraine War, sanctions, soaring inflation, and shifting monetary policies were the main catalysts for this doozy month. In equity markets, the Dow (-4.6%), Nasdaq (-9.1%), and S&P 500 (-5.0%) all finished solidly in the red, marking their worst quarter since Q1 2020. Meanwhile, in the fixed income markets, U.S. bonds have witnessed their worst quarter in more than 40 years. The Bloomberg U.S. Aggregate bond index—largely U.S. Treasury's, highly rated corporate bonds, and mortgage-backed securities—returned minus 6% in 2022 through Wednesday, on track for the biggest quarterly loss since 1980 (Source: Wall Street Journal).

Fed takes hawkish stance, raises rates by 25 bps and hinted to further hikes

In March, the Fed raised the rate by 0.25%, the first benchmark federal-funds rate increase in the United States since 2018, and signaled six more hikes this year. The U.S. Bureau of Labor Statistics posted the monthly U.S. CPI data on March 10th, 2022. The data shows that in February – the Consumer Price Index for All Urban Consumers rose 0.8 %, seasonally adjusted, and rose 7.9% over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.5% in February (SA); up 6.4% over the year (NSA).

Another important economic KPI tracked by the Fed is the core personal consumption expenditures (PCE) price index. The PCE increased 5.4% from a year ago, the largest increase in nearly 40 years. Federal Reserve officials consider the PCE gauge to be the most reliable inflation indicator.

With the rate hikes, the Fed is indirectly – through banks – raising borrowing costs in the hopes of easing consumer demand that may be pushing prices higher. This process affects the bonds markets since higher interest rates mean lower prices for existing bonds. Consequently, the changes will trigger a reshuffling of fixed income investors' strategies which can be visible through tracking fund flows into Fixed Income ETFs.

First 2-10 yield curve inversion since 2019

Another headline buzzing the markets is the yield curve inversion, a rare phenomenon where the 2-year note is now higher than the 10-year note yield. This part of the yield curve is the most closely monitored by economists who consider that the inversion is a possible signal that the economy is heading into a recession. The 2-year to 10-year spread was last in negative territory in 2019, before the pandemic lockdowns that sent the global economy into a steep recession in early 2020.

Global Fixed Income ETFs flows in March 2022

In the ETF space, Fixed Income ETFs lured in over $24.13 billion in net inflows in March 2022 and roughly $35.2 billion overall this year. America-domiciled Fixed Income ETFs had the lion's share – receiving $21.6 billion of the total net inflows. Meanwhile, Europe-domiciled Fixed Income ETFs netted $2.5 billion, while the APAC region witnessed net outflows of -$50 million. Below, we take a look at the major ins and outs flows of the American and European Fixed Income ETFs market. 

America's Fixed Income ETFs top fund action

Among the top inflows receivers in March were:

  • iShares 20+ Year Treasury Bond ETF (TLT): $4.57 billion
  • Vanguard Total Bond Market ETF (BND): $2.83 billion
  • iShares 0-5 Year TIPS Bond ETF (STIP): $1.46 billion
  • iShares Short Treasury Bond ETF (SHV):  $1.44 billion
  • iShares 7-10 Year Treasury Bond ETF (IEF): $1.21 billion

TLT, the largest recipient, seeks to track IDC US Treasury 20+ Year Index (4PM) and invests in U.S. Treasury bonds with remaining maturities greater than twenty years. The fund has a total expense ratio of 0.15% and trades primarily on the NYSE Arca. As of March 28th, 2022, TLT's weighted average coupon rate is 2.48%.

On the other side of the fund flows spectrum the following ETFs were among the biggest flow bleeders in March:

  • iShares iBoxx $ High Yield Corporate Bond ETF (HYG): -$1.12 billion
  • iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD): -$856 million
  • PIMCO Enhanced Short Maturity Strategy Fund ETF (MINT): -$646 million
  • Vanguard Short-Term Bond ETF (BSV): -$521 million
  • iShares Short-Term Corporate Bond ETF (IGSB): -$506 million

HYG, seeks to track the Markit iBoxx USD Liquid High Yield Index and invests in U.S. denominated high-yield corporate bonds. In terms of sector exposure (as of March 28th, 2022), consumer cyclical has the highest weighting (19.85%), followed by communications (18.42%), consumer non-cyclical (14.94%), and energy (11.99%). 28.55% of the underlying corporate bonds have a maturity of 7-10 years, 24.48% have 5-7 years, and 22.44% have 3-5 years. More than half of the constituents are BB-rated, 33.76% B rated, and 10.15% CCC rated. HYG has a total expense ratio of 0.48% and trades primarily on the NYSE Arca. As of March 28th, 2022, the fund's weighted average coupon rate is 5.45%.

Europe's Fixed Income ETFs top fund action

Among March's most popular Fixed Income ETFs in Europe were:

  • iShares Core € Corp Bond UCITS ETF (IEAC): $757 million
  • iShares J.P. Morgan $ EM Bond UCITS ETF (JPEA): $637 million
  • Invesco US Treasury Bond 7-10 Year UCITS ETF (TREX): $434 million
  • iShares € High Yield Corp Bond UCITS ETF (IHYG): $365 million
  • iShares € Ultrashort Bond UCITS ETF (ERNE): $342 million

The top recipient in March – IEAC – seeks to track the Bloomberg Euro Corporate Bond Index and invests in Euro denominated investment grade corporate bonds (56% BBB rated, 37% A Rated) issued in various countries, including France (20.47%), the United States (19%), Germany (14.2%) and the United Kingdom (8.59%) – among other. Around 29% of the bonds are issued by companies in the banking sector, 14% by companies operating in consumer non-cyclical, and the rest is spread across other sectors. In terms of underlying bonds maturity, 28% mature in 3-5 years, 20% in 5-7 years, 17% in 7-10 years, and 14% in 2-3 years.

The fund has a total expense ratio of 0.2% and trades on multiple European exchanges such as the London Stock Exchange (IEAC, EUR or IEBC, GBP), the SIX Swiss Exchange (IEAC, CHF), the Euronext Amsterdam (IEAC, EUR), the Deutsche Boerse Xetra (EUN5, EUR) and the Borsa Italiana (IEAC, EUR).

Among the least popular Fixed Income ETFs in March were:

  • iShares China CNY Bond UCITS ETF (CNYB): -$624 million
  • PIMCO US Dollar Short Maturity Source UCITS ETF (MINT): -$544 million
  • Lyxor Core US TIPS (DR) UCITS ETF: -$423 million
  • iShares China CNY Bond UCITS ETF (CYBA): -$368 million
  • iShares $ Short Duration Corp Bond UCITS ETF (SDMXX): -$297 million

CNYB seeks to track Bloomberg China Treasury + Policy Bank Index and invest in CNY denominated investment-grade bonds issued by the Ministry of Finance of the PRC, and debt issued by Chinese policy banks. The fund has a total expense ratio of 0.35% and trades on

multiple European Exchanges – the Borsa Italiana (CNYB, EUR), the London Stock Exchange (CNYB, GBP), the Six Swiss Exchange (CNYB, USD), the Euronext Amsterdam (CNYB, USD), and the Deutsche Boerse Xetra (ICGB, EUR).

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