Following poor performance in Q3, fixed income is struggling to start the new quarter. SImilar to Q3, the bulk of weakness is in long-duration bonds. This is evident with the iShares 20+ Year Bond ETF (TLT) which fell to its lowest levels since August 2007. Remarkably, TLT is now at levels prior to the entire bond bull market which began at the depths of the financial crisis as central banks embarked on more than a decade of ultra-easy policy to support the economy.

So far, TLT is down 13% year to date. It’s the largest fixed income ETF, and many investors’ preferred vehicle to get exposure to long-term Treasuries. There is some disagreement on the causes behind the move in long-term yields with some pointing to large amounts of Treasuries that will be auctioned off in the coming months to finance the federal government’s deficits. Others believe that the bond market is finally accepting the reality that inflation is now entrenched and that higher rates are here to stay. 

Some with a longer-term view don’t see much unusual about the breakout in long-term yields given that this tends to happen when central banks embark on tightening policy. As a result, we are seeing the curve un-invert as the spread in yields between short-duration and long-duration bonds continue to shrink.

Finsum: TLT is the most popular fixed income ETF. It’s now at its lowest levels since 2007 as long-term Treasury yields break out to new highs.

It’s a challenging period for fixed income investors given uncertainties around the economic outlook and monetary policy. While some are making bold bets on whether inflation will perk up once again or the economy fall into a recession, CIBC recommends that investors embrace this period of ‘higher for longer’ by focusing on short duration and high quality bonds.

With this strategy, investors can take advantage of generous yields while shielding themselves from potential risks. In terms of the bank’s outlook, its base case remains a moderate slowdown and a mild recession. Yet, it believes that many of these risks have already been priced in which is one factor in its bullishness towards the asset class.

Due to recent data indicating a pullback in consumer spending, weakness in retail sales, and a slowdown in housing activity, the firm believes that recession is more likely than another period of spiking inflation. Further, credit card balances are rising, while excess savings from the pandemic have been basically depleted.

If this scenario were to materialize, inflation would likely trend lower which would give central banks more latitude to loosen policy and lead to price appreciation for fixed income. 

Finsum: CIBC shared some thoughts on the economy and fixed income. It’s bullish on the asset class as it believes a mild recession is likely next year.

Direct indexing is the convergence of two developments. One is that we increasingly live in a world of customization and personalization whether it comes to our newsfeeds, food orders, playlists, etc. The other is that research continues to show that most investors are better off investing passively rather than actively managing their portfolios.

At first glance, there seems to be a contradiction between these two notions. However, direct indexing manages to thread the needle by retaining the benefits of passive investing such as diversification and low costs while also allowing for customization in order to account for an investors’ goals and needs.

For instance, a tech executive may have outsized exposure to the industry due to some compensation in the form of stock options. In their own portfolio, they may look to reduce exposure to tech in order to create more diversification and dampen risk. 

Another benefit is that capital gains losses can be more effectively harvested with direct indexing. This means that if the tech executive were to sell some of their stock options, then the tax bill can be lowered by applying harvested tax losses from the direct indexing portfolio.   

Finsum: Direct indexing provides many advantages compared to passive or active management. Here are some of the benefits.