Displaying items by tag: fed

Following the recent selloff in the bond market which has pushed yields on the 10-year Treasury above 5%, Michael Contopolous of Bernstein Advisors compiled some of the best opportunities that he’s noticing in fixed income. 

The first is Treasury Inflation-Protected Securities (TIPS) which are offering a real yield of 2.5%. This is the highest level since 2007 and in the 25th percentile of real yields since TIPS were introduced in 1997. In contrast to most fixed income securities, TIPS would see an increase in returns if inflation expectations were to rise. 

Currently, the spread between the 10Y and 2Y Treasuries is inverted. If the economy experiences an acceleration or a sharp turn lower, it’s likely that the curve will steepen. Thus, fixed income investors can consider a steeper curve. It can have a bullish or bearish tilt depending on an investors’ economic outlook.

Another area of opportunity is preferred securities which are priced much lower than corporate bonds following the regional bank crisis earlier this year. There's a particular opportunity in the preferred share of banks which could rally if the yield curve steepens, or earnings start to grow again. 

Finsum: Fixed income is seeing renewed interest following the recent selloff. Here are 3 opportunities to consider.

According to Travis Spence, the head of ETF distribution at JPMorgan Asset Management, future growth in the ETF industry will be driven by active strategies that will be the main source of innovation in the space. 

Currently, active funds only account for 5% of the total market but account for 25% of inflows. Some of the reasons that investors are favoring active ETFs is greater transparency, liquidity, and pricing. Thus, he believes that more active strategies will be accessible through ETFs in the coming years. And he sees growth in the US and internationally, although adoption has been slower in the latter. 

In fixed income, he believes that active managers have some advantages due to greater inefficiencies in the market and increased difficulty and constraints of tracking a fixed income benchmark. Additionally, many market cap-based indices are overrepresented with indebted companies. 

He added that, “It is easy to see why an active approach to fixed income makes sense. Even passive ETFs are arguably active due to the availability of bonds. Having an active approach in fixed income, where you do not automatically hold the most indebted issuers, fully integrate ESG and actively manage turnover and transaction costs, can offer an attractive solution for investors.”

Finsum: JPMorgan’s head of ETF distribution, Travis Spence, shares why he’s optimistic about active fixed income, and the trends driving its growth. 

Despite a brutal selloff in fixed income, Vanguard sees upside for parts of the asset class given the opportunity to lock in high rates and likelihood that we are in the final stages of the Fed’s hiking cycle. It anticipates a shallow recession in the middle of next year and believes that bonds once again offer diversification and positive returns for investors.

It favors high-quality IG corporate debt due to the strength of corporate balance sheets, as many companies took advantage of ultra-low rates in 2020 and 2021. In recent months, the category has endured significant selling especially as long-duration assets have been hit hardest. 10-year Treasury yields recently exceeded 5% which is the highest level since 2007 amid a spate of positive economic data.

Vanguard is neutral in terms of exposure to lower-grade corporate debt since many of these companies will need to raise capital in a high-rate environment and deal with increased competitive pressures in some sectors. It also sees opportunities in mortgage-backed securities due to its low default risk, diversification, and liquidity. It also favors longer-duration municipal bonds rated below AAA. 

Finsum: Vanguard believes that investors should stay the course when it comes to fixed income despite the recent selloff. It sees more opportunity in particular segments.  

Financial markets are increasingly complicated these days given the uncertainty regarding inflation, monetary policy, and the economy’s trajectory. For investors, the challenge is heightened as both equities and bonds have become increasingly correlated. In a piece for Pension & Investments, MFS Investment Management shared why active fixed income makes sense in this environment and detailed the firm’s approach.

According to Pilar Gomez-Bravo, the co-CIO of fixed income at MFS, “With this macro backdrop and the uncertainty around central bank policy, alpha generation from active management will be a more important factor for most fixed-income investors going forward.” 

With increased volatility, MFS recommends that fixed income investors ensure that they are sufficiently diversified to minimize risk by properly balancing duration and default risks. Its active management strategy is based on collaboration between its investment teams, consistency in its investment process, a focus on generating alpha throughout the cycle, and conviction in taking action when there are dislocations in the market.

Some other elements of the firm’s active fixed income approach is to manage and structure the portfolio to express a broad view and diversity of thought. Each portfolio is stress tested to ensure resilience, while the fixed income team stays connected to the equity team to get a holistic view of the markets and economy.

Finsum: Active fixed income is seeing a substantial increase in inflows given relatively high yields, while there is considerable uncertainty about the economy and monetary policy.

The breakout in long-term yields has resulted in bonds turning negative on the year. Bonds could rally if the Fed does cut rates next year as anticipated by the market, but the rally would most likely be contained in the short-duration securities according to Blackrock’s Jeffrey Rosenberg. This would be a change from the long end as typically the best place to hedge against equities.

Rosenberg believes that the combination of higher Treasury supply and quantitative tightening will lead to upward pressure on long-term rates. The yield curve has become historically inverted which means that bonds would rally the hardest at the short end in the event of a rate cut. However, many passive benchmarks are overweight toward intermediate and long-term durations.

It’s also clear that there is a different relationship between stocks and bonds in a high rate, high inflation world. This has meant that fixed income is less effective as a source of diversification. However, this is most true with long-duration bonds. Short-duration bonds continue to work to diversify against equities especially as the Fed is likely to remain vigilant against longer-term inflation expectations rising even if it shifts on policy. 

Finsum: Blackrock’s Jeffrey Rosenberg details his outlook for active fixed income. He favors short-duration bonds given elevated volatility and the inverted yield curve.