Displaying items by tag: fed

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.

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. 

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.    

Entering the year, there was optimism around real estate stocks given consensus expectations of rate cuts due to inflation falling to the Fed’s desired level and a weakening economy. However, the economy has defied skeptics and remains resilient, while inflation is plateauing at higher levels. As a result, the Fed will be less dovish than expected, and the market has tapered back expectations for rate cuts to between 1 and 2 by year-end. 

Another consequence of the data is that mortgage rates are trending back to last year’s highs, with the 30Y at 6.9%. The real estate sector sank lower following last week’s inflation report, led by self-storage companies, office REITs, and homebuilders on the downside. 

Over the past month and YTD, the Real Estate Select SPDR Fund (XLRE) is down 4.6% and 7.8%, respectively. The current environment of rates at a 23-year high is clearly a major headwind. And there are no indications that the status quo will meaningfully change until there is improvement in terms of inflation or more damage to the economy. The impact is evident in terms of Fed futures. At the start of March, odds indicated more than a 50% chance that there would be four or more rate cuts by the end of the year. Now, these odds have plummeted to 5%. 

Finsum: Real estate stocks have sunk lower in the last month, along with the odds of aggressive rate cuts by the Fed. As long as ‘higher for longer’ persists, there will be considerable stress for the weakest segments of the real estate market.

Active fixed income demand is surging. The secular drivers are increased comfort and adoption by advisors and investors with the category, in addition to the conversion of actively managed fixed income mutual funds into ETFs. From a cyclical perspective, the current environment, which has attractive yields but considerable uncertainty about the Fed and economy, also favors active fixed income strategies.

Despite its growth, active fixed income makes up less than 4% of allocations, revealing that there is more upside. As long as the Fed remains in a wait-and-see mode, active fixed income is likely to remain in favor. And this period of uncertainty has certainly been extended following the recent string of robust inflation and labor data. 

This type of rate environment requires a more flexible and agile approach, which is better suited for active fixed income. According to Bryon Lake, JPMorgan Asset Management Global Head of ETF Solutions, “To me, it’s all about active fixed income. With what is happening in the rate space, investors are all rethinking their fixed income allocations as we speak. We want to talk about active fixed income … where investors can dial in the exposures that they’re looking to get in the ETF wrapper.”

Finsum: Current uncertainty about the timing and number of Fed rate cuts in 2024 has been a major contributor to the growth of active fixed income. And this uncertainty has increased following recent economic data.