Displaying items by tag: Treasuries

2024 has proven to be a year of relentless volatility for fixed income, given mixed signals about inflation, the economy, and monetary policy. However, there are plenty of opportunities to make money amid these conditions. 

A consequence of high rates is that the US government is expected to pay more than $1 trillion in interest to bondholders this year, which is more than double the average from the previous decade. Currently, all Treasury securities are yielding more than 4%, and due to elevated rates, investors have a higher margin of safety. This means that fixed income is once again a source of meaningful income for investors and serves as a counterweight to equities.

Deal flow also remains robust, which is a positive for underwriters and sponsors. According to Bloomberg, bankers who underwrite bond offerings are expected to see a 25% increase in bonuses. In terms of sales and trading, bonuses are expected to rise by 20%, compared to an increase of 5% to 15% for equities. 

Another trend in fixed income is the electronication of the bond market. Traditionally, bond trading has been done over the phone or through banks, which has resulted in illiquidity and less price discovery. 

Now, volume is moving to electronic bond exchanges, which is benefiting market makers like Citadel Securities and Jane Street. These firms are now making markets in government and corporate bonds. It’s estimated that 42% of investment-grade debt trades were electronic last year, compared to 31% in 2021.

Finsum: Entering the year, many were confident that Fed rate cuts would fuel a bull market in bonds. This has failed to materialize, but there have been opportunities in fixed income.

April was marked by a mean reversion as robust inflation data and continued economic resilience dampened expectations of Fed dovishness later this year. As a result, flows into equity ETFs dropped from $106 billion in March to $41 billion in April. 

In contrast, flows surged into fixed income ETFs, increasing more than 60% to $27.4 billion. Lower-risk government bond ETFs attracted the most inflows at $10.1 billion, which was the highest since October of last year. Within the category, short and intermediate-term Treasuries captured the most inflows. 

In the US, flows into fixed-income ETFs were greater than equity ETF flows, at $15.2 billion vs. $14.1 billion. Scott Chronert, the global head of ETF research at Citi, noted “US-listed ETF flows decelerated this month against a generally risk-off backdrop. Underlying trends also pointed to more cautious positioning. Fixed income led all asset classes, but the gains were skewed towards core products, shorter durations, and Treasuries.”

Until something material changes in regard to inflation or the economy, it’s likely that investors will continue to favor ETFs that benefit from short-term rates remaining higher for longer. 

Finsum: Fixed income inflows into ETFs sharply increased in April, while equity inflows declined. This was a downstream effect of reduced expectations of Fed rate cuts in the second half of the year due to an uptick in inflation.

Prudential conducted a survey of 198 financial advisors to gain insight on how they are investing and constructing portfolios for retirees. 80% use separate portfolios that are specifically designed for retirees. Additionally, the use of targeted portfolios was higher among advisors who were more knowledgeable about planning for retirement. 

Another takeaway from the survey is that 50% of retirees prefer to live off of income from their portfolios. Thus, advisors need to ensure that their portfolios generate income for clients while balancing other factors like total return and diversification.

In terms of asset classes for retirement portfolios, advisors favored long-term fixed income, US large-cap stocks, and TIPS. Advisors who were more knowledgeable about retirement planning favored long-term bonds and TIPS to a greater degree than less knowledgeable advisors. 

The survey also showed that most advisors are constructing retirement portfolios themselves or with the assistance of third-party recommendations or allocators. Advisors with less knowledge about the subject were more likely to outsource portfolio construction. 

Most advisors are helping clients plan for retirement by optimizing for goals such as flexibility in spending or timeframe. This is in contrast to other approaches, which include using a bucket strategy or segmenting the portfolio into different strategies for different purposes.

Finsum: Prudential conducted a survey of financial advisors. Those with more knowledge about retirement planning favored long-term bonds and tend to use differentiated strategies.

Demand for US Treasuries continues to be strong despite high levels of issuance. According to the Treasury Department, foreign holdings of Treasuries saw their fifth monthly increase, reaching new highs.

As of the end of February, foreigners held $7.97 trillion of US Treasuries, nearly 9% higher than February 2023. Japan is the largest holder of Treasuries, outside of the US, at $1.17 trillion, which is the most since August 2022. 

However, some believe that the country may be looking to boost the value of its currency, as it hit a 34-year low against the dollar earlier this week. In 2022, Japan intervened in currency markets by selling dollars and buying the yen when it was at similar levels. As a result, its holdings declined by $131.6 billion due to these transactions. 

Another trend is that China’s holding of Treasuries continues to decline. The country held $775 billion in Treasuries, a decline of $22.7 billion from the previous month. This is the lowest amount since March 2009. 

Europe saw the biggest monthly increase of $27 billion and owns $320 billion in total. Great Britain also saw a $9 billion increase in Treasury holdings to reach $701 billion. 

Finsum: Despite recent volatility in US Treasuries, foreign holdings continue to rise. Japan remains the largest owner of Treasuries, while China continues to reduce its stake.

Bonds have weakened to start the year, given increasing uncertainty about the direction of the economy and monetary policy. Weitz Investment Management notes that credit spreads have tightened even while long-term yields move higher. Thus, the firm believes there is greater potential for losses if inflation meaningfully picks up from current levels or credit spreads widen.

It also believes that massive fiscal deficits are an indication that the inflation issue is not going to disappear anytime soon. It notes that over the last 4 years, deficits have averaged 9% of GDP, which was only seen before during wars. Currently, the national debt is increasing by $1 trillion every 100 days. And this is a major reason why the Fed’s aggressive hikes have not resulted in a recession. It also means that Treasury issuance will continue to be elevated as debt will need to be refinanced at higher rates. 

Amid this backdrop, the firm notes that there is considerable complacency among investors. It notes that credit spreads declined across the board in Q1 and are now at 10-year lows. It believes this is likely a result of strong demand for bonds as new issues have been oversubscribed and there has been a flattening of yields in the credit curve. 

To combat these risks, Weitz recommends looking for opportunities in fixed income across the spectrum and beyond the benchmarks. It recommends diversified and broad exposure, including fixed and floating-rate securities. Ultimately, investors need to be nimble and prepare for various scenarios, such as the economy continuing to be robust, inflation resuming its ascent, or the economy stumbling into a recession.

Finsum: Weitz Investment Management sees considerable complacency within fixed income while also noting some risks. It recommends investors seek broad and diversified exposure to the asset class and pursue a more active and nimble approach.