In a CNBC interview, Blackrock COI Rick Rieder shared some thoughts on Blackrock’s newest active fixed income fund, and why he believes that active fixed income offers several advantages for investors. 

Active fixed income managers have the latitude to seek opportunities that are beyond what’s represented in the indices. As an example, he cites the Blackrock Flexible Income ETF (BINC) which has outperformed its peers since its inception in late May. Over this period, BINC is up 0.3%, while the iShares Core US Aggregate Bond ETF (AGG) is off by 4% and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is down 0.2%. 

BINC’s biggest allocation is to bonds outside of the US at 22% with US high yield debt and US investment grade debt accounting for 17% and 14%, respectively. According to Rieder, the stronger US dollar is leading to more attractive opportunities overseas. 

Passive funds are unable to take advantage of these opportunities. Another advantage for active fixed income is that certain pockets of risk can be avoided as well. He cites this combination as why active fixed income has outperformed, since it leads to more yield and reduced volatility.  

Finsum: Blackrock CIO Rick Rieder explained some of the structural advantages of active fixed income to identify opportunities and avoid pockets of weakness. 

In a strange quirk, millennial investors have a greater allocation to fixed income than older generations according to a recent survey from Charles Schwab. Millennials currently have 45% allocated to fixed income, while Generation X and baby boomers have 37% and 31%, respectively. Looking ahead, 51% of millennials plan to buy fixed income ETFs next year while 45% of Generation X and 40% of baby boomers plan to do so. 

Of course, this is contrary to the conventional thinking that younger investors should have greater capacity for risk given that they have a longer timeframe to ride out volatility to earn higher returns. However, this conservative positioning could be a reflection of the extraordinary events that have taken place over the last couple of decades which have likely shaped their attitudes. These include the dot-com bubble, the financial crisis in 2008, and the pandemic. 

Thus, many millennial investors are focusing more on reducing risk with their high levels of exposure to fixed income while eschewing equities. According to David Botset, the head of strategy and product at Schwab Asset Management, stocks are the ‘growth engine’ of a retirement portfolio so underexposure could have negative long-term implications. 

Finsum: Millennial investors have lived through unusually volatile markets which have impacted their thinking and led to an overallocation to fixed income. 

One of the biggest beneficiaries of the October CPI report was office REIT stocks as the sector saw double-digit gains due to the odds of further hikes diminishing, while expectations for cuts in 2024 increased. It marked the biggest gains for the sector since November 14 when the Covid-19 vaccine was announced.

One of the biggest headwinds for this group has been high levels of debt which is exacerbated by high interest rates. So, the relief rally makes sense given that lower levels of inflation would portend looser monetary policy and a decline in short and long-term rates. Many stocks in the sector have high levels of short interest which also make them more susceptible to big moves higher in the event of a positive catalyst. 

However, there remains considerable uncertainty over whether these gains will last given that the fundamental outlook remains impaired. Companies continue to reduce office space as remote and hybrid work arrangements have remained even after the pandemic. Prior to the pandemic, the office vacancy rate was at 9.4%, while it’s 13.5% currently. 

There’s little indication that this could change as demand for new office space is subdued. According to data provider VTS, the number of new searches for office space in major cities is 47% below pre-pandemic levels. 

Finsum: Office REITs have enjoyed a decent rally following the CPI report. However, the longer-term picture remains challenging with no rebound in sight for office space. 

In its 2024 investment outlook, Morgan Stanley shared why it’s bullish on fixed income. A major reason is that it expects for inflation to continue moderating. Within fixed income, the bank likes high-quality bonds and government debt from developed markets. In terms of equities, it sees less upside given that markets have already priced in a soft landing.

According to Serena Tang, Chief Global Cross-Asset Strategist at Morgan Stanley Research, “Central banks will have to get the balance correct between tightening just enough and easing quickly enough. For investors, 2024 should be all about threading the needle and looking for small openings in markets that can generate positive returns.”  

The bank recommends a more cautious approach in the first half of 2024 as there are numerous headwinds including restrictive monetary policy, a conservative earnings outlook, and slower economic growth. However, it sees rate cuts starting in June of 2024 which should provide a boost to the economic outlook in the second half of 2024 due to inflation falling to the Fed’s target.

It also expects lower levels of global growth in the US, Europe, and UK while also seeing weak Chinese growth as a risk, although it believes that the country will avoid a deflationary spiral that could have negative ripple effects for the wider region. 

Finsum: Morgan Stanley shared its 2024 outlook. Overall, it’s bullish on fixed income due to expectations that inflation will continue to fall while growth will disappoint in 2024. 

Something has shifted in the market following the softer than expected October CPI report. At one point this year, a recession in 2024 seemed like the consensus trade, especially following the failure of Silicon Valley Bank, stresses in the banking system, and fears that high rates would choke off growth. 

Now, the odds of a soft landing are rising. According to Robert Tipp, PGIM Fixed Income’s chief investment strategist, many seem to be aware of the historical context of previous soft landings. He cites 2018 and the mid-1990s as examples of rate hike cycles that didn’t result in a recession.

He believes that rising rates and tighter financial conditions are only recessionary, if economic growth is dependent on borrowing. He adds that “The excesses that would typically create a recession are simply not in existence. A lot of the expansions in the past were dependent on borrowing, but this time, it is a job growth driven organic expansion.” 

In contrast to previous borrowing-driven expansions, there is much less leverage. Financial institutions remain well-capitalized, household balance sheets are in solid standing, lending standards remain high, and there are no asset bubbles in sight. Adding to this is that the economy continues to add jobs while consumer spending remains firm on a real basis. 

Finsum: PGIM’s Robert Tipp believes that a soft landing outcome is likely. He points to the lack of leverage, historical instances, and firmness of the labor market and consumer spending as primary factors.