Displaying items by tag: yields

The transition away from zero interest rate policy (ZIRP) wasn’t painless, requiring sharp rate hikes and a challenging bear market before monetary conditions began resembling pre-2008 norms. Now, with higher government bond yields, investors have a genuine risk-free income opportunity, prompting a rethinking of portfolio strategies. 

Angelo Kourkafas of Edward Jones suggests that as cash yields dip below bond returns in 2025, bonds are poised to outperform, restoring their historical role in balanced portfolios. 

While trade policy uncertainty could complicate this outlook, he expects Canadian bond yields to stay rangebound, with income rather than price appreciation driving returns. He sees this fixed-income strength complementing a more measured equity rally, with a diversified stock-bond mix offering steadier returns in the year ahead.

Finsum: Oversized cash positions, could become a portfolio drag, especially for conservative investors who could lock in reliable income with bonds.

Pakistan and Kenya have made some of the quickest economic turnarounds in recent memory for emerging market economies and as a result investors are buying up their bonds rapidly. This is part of a larger trend as previously neglected debts from countries like Egypt, Pakistan, Nigeria, and Kenya are now appealing again, driven by interest rate hikes and currency market liberalizations.

With falling interest rates in mature markets, these relatively higher yields are enticing. In Turkey, high interest rates have drawn investors back, and Egypt's debt has seen significant foreign investment, supported by currency devaluation and free-floating exchange rates. Investors view these reforms as promising, despite risks such as volatility and potential capital controls.

Potentially prolonged high US interest rates could challenge these markets, particularly for countries with high debt interest payments. Nonetheless, some investors still find local currency bonds more attractive than dollar-denominated debt, seeing the current situation as the beginning of more gains.

Finsum: It might not be too late to chase the yield curve in some of these emerging market economies. 

Stringer Asset Management shared some thoughts on fixed income, monetary policy, and the economy. The firm notes that while inflation has remained stubbornly above the Fed’s desired levels, it will move closer to the Fed’s target over time. One factor is that the M2 money supply is starting to decline, which is a leading indicator of inflation. Another is that fiscal stimulus effects are finally waning.

Thus, Stringer still sees rate cuts later this year, although it’s difficult to predict the timing and number of cuts, creating a challenging environment for bond investors. During this period of uncertainty, it favors active strategies to help reduce risk and capitalize on inefficiencies. Active managers are also better equipped to navigate a more dynamic environment full of risks, such as the upcoming election and a tenuous geopolitical situation.

Stringer recommends that investors diversify their holdings across the yield curve and credit risk factors. It favors a balance of riskier credit with Treasuries. This is because the firm expects the bond market to remain static until the Fed actually cuts. It’s also relatively optimistic for the economy given that household balance sheets are in good shape, corporate earnings remain strong, and the unemployment rate remains low. These conditions are conducive to a favorable environment for high-yield debt. 

Finsum: Stringer Asset Management believes that fixed income investors should pursue an active approach given various uncertainties around the economy, inflation, and monetary policy in addition to geopolitical risks.

In Q1, inflows into active fixed income ETFs exceeded inflows into passive ETFs at $90 billion vs. $69 billion. This is a remarkable change from last year, when active fixed income ETFs had net inflows of $19 billion vs. $279 billion for passive bond ETFs.  

Two major factors behind this development are an increase in uncertainty about the economy and monetary policy and yields above 5% for some of the most popular offerings. According to Ryan Murphy, the head of fixed income business development at Capital Group, this is the beginning of “a longer multi-quarter and potentially multi-year trend out of cash. Investors are getting the best compensation on fixed income in 20 years.” 

Flows could accelerate into bond funds as there is $6 trillion in money market funds once the Fed actually starts cutting rates. Yet, the current ‘wait and see’ period is challenging for fixed-income investors, but it’s an opportune moment for active strategies given opportunities to find distortions in prices and credit quality. Stephen Bartolini, portfolio manager at T. Rowe, notes, “The ability to not just blindly buy the index but be smarter and choose around security selection is critical at the moment.” 

Finsum: Active fixed income inflows were greater than inflows into passive fixed income ETFs. It’s a result of attractive yields and heightened uncertainty about the economy and monetary policy.    

Invesco recently completed its Q1 update on the landscape for alternative assets. In terms of private credit, the firm sees an improving environment due to a resilient economy, inflation trending lower, rate cuts later in the year, and expectations of liquidity events in private equity. Overall, it sees investors able to get attractive yields without compromising on credit quality. It expects overall yields to remain between 11 and 12% for the year for private credit investors. 

The firm sees opportunity in distressed debt and special situations to lend to ‘good companies’ with weakened balance sheets. It believes the higher rate environment has hurt smaller companies and that many of these companies are operationally sound but are ‘liquidity-constrained’, creating an opportunity to invest at attractive valuations. 

In terms of real assets, Invesco notes that fundamentals remain strong, for the most part, despite lower transaction volume and stresses created by the high-rate environment. It’s particularly bullish on real estate due to improving monetary conditions, which should support transaction volumes. Even during the downturn, income fundamentals remained robust across most categories. The firm sees sound fundamentals in most areas of real estate except for offices and overbuilding in some markets. Additionally, recent economic data has been supportive of a ‘soft landing’ for the economy, which is also bullish for real estate. 

Finsum: Invesco shared its thoughts on alternative assets. Overall, it’s bullish on the asset class and sees the most upside for real estate and private credit due to its positive forecast for the economy in 2024.