Now, with a bumper 50 basis points rate cut kicking off the Federal Reserve (Fed) easing cycle, and less promising economic cycles still a reality, what is the outlook for fixed income ETFs?

For European credit, all-in yields are still well above the average 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 a 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 broadly in line with the 10-year historical average, while the European high yield market (HY) is even slightly tighter versus the 10-year historical average.

While economic growth across many European countries continues to slow, this isn’t necessarily negative for fixed income investors. If central banks can carefully navigate the much discussed ‘soft-landing’ scenario, investors could benefit from credit spread remaining contained, a rates rally, and the healthy carry provided by the asset class.

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