Eq: Total Market
For bond traders, 2023 has been one of the most volatile years in recent decades. It’s not entirely surprising given the various forces impacting the market such as inflation, a hawkish Fed, a slowing economy, and significant strains to the banking system.
In a Bloomberg article, Michael Mackenzie and Liz McMormick discussed reasons why these conditions will persist for the remainder of the year. In response, investors are looking to remain nimble and flexible especially given wide swings and a risky environment.
Bond traders are expecting this uncertainty to continue as long as the Fed continues its hiking cycle and gets clear when it will start cutting rates. A major factor in Treasury inflows has been the slowing economy as recession fears increase, however the labor market continues to add jobs, and the economy continues to expand. Additionally, the recent spate of bank failures and financial stress also was supportive of Treasury inflows.
Maybe the best illustration of the volatility is the 2-Year Treasury yield which got as high as 5.1%, following Fed Chair Powell’s hawkish comments. And. it got as low as 3.6% a few days later amid the failure of Silicon Valley Bank.
Finsum: The bond market has experienced incredible volatility in Q1. However, odds are that this volatility will continue all year.
Check your bank statement. Chances are – and this is just a hunch, mind you – it probably doesn’t total anywhere near oh, say, $10.82 billion. Double check it, in fact.
Point is: that’s the total which the global alternative market financing market came in at, according to grandviewresearch.com. Not only that, from 2023 to 2030, it’s expected to catapult at a compound annual growth rate of 20.2%. Fueling the industry’s been the need to access capital for small businesses and individuals. Given the stringent requirements among traditional banking institutions, it was that much tougher for many to secure loans. Enter alternative finance products. Especially among those who might fall short of meeting the rigid requirements of traditional banks, there’s a greater accessibility to capital through alternative finance products.
While yields have returned, in light of inflation and policy uncertainty, bonds just might have to apply a little elbow grease to deliver the degree of diversification they at one time dispensed, according to blackrock.com.
Treasuries returned 3% in Q1 which is its best quarterly performance since 2020. In an article for Bloomberg, Liz McCormick and Michael Mackenzie covered some reasons for why this outperformance should continue.
Three of the major factors are expectations of increased demand from Japan, a weeklong pause in auctions, and strong inflows from institutional and retail investors amid higher rates and wobbles for the banking system.
The next major, market-moving event will be the March jobs report on Friday. Some analysts see the potential for weakness in Treasuries if there is a strong report regarding wages and jobs. This could undermine of the catalyst behind the Treasury rally - expectations that the Fed’s hiking cycle is nearly over. On the other hand, Treasuries could rally with a weak report.
Demand for Treasuries spiked amid the bank failures last month. As a result, yields for short-term notes tumbled to their lowest levels of the year with the 2-year Treasury yield declining by a 100 basis points. It also led to market expectations of the Fed terminal rate declining, while odds of the next Fed move being a cut rather than a hike, also jumped higher.
Finsum: Treasuries outperformed in Q1 with a major catalyst being bank failures which led to a surge in demand for safe-haven assets.
Short-term dated options are continuing to grow in popularity which many analysts are warning could have unintended consequences for market stability according to a Reuters article by Saqib Iqbal Ahmed.
The fastest growing segment is zero days to expiry (ODTE) options, where traders are looking to profit from small, intraday market moves. Most options are based on indices, popular ETFs, or single stocks. As of March 2022, the daily notional value of all ODTE trades had exceeded $1 trillion.
The contracts are popular among buyers, because small moves in the underlying instrument can result in huge moves for its derivatives. For sellers, the appeal is that the options decay in value and the trade can be closed at the end of the day.
However, many warn that large positions in these options could set off a ‘squeeze’ in the event of an unexpected, intraday move. This would cause option sellers to take large losses and potentially force hedging which could exacerbate the move in the underlying instruments. According to JPMorgan, it would be a similar dynamic to the ‘Volmageddon’ crash of 2018 when many inverse volatility products crashed due to a large spike in the VIX.
Finsum: A new threat to market stability is the rise of ODTE options which are becoming very popular with retail and institutional traders. However, they do have the potential to exacerbate large, intraday market moves.
Last year, active was the operative word, as passive management stared into the taillights of fixed income active managers, according to bsdinvesting.com.
In the midst of the Fed’s policy change and a rejuiced market, active management improved markedly in the second half of the year. Over the last two quarters, an average of 60% of active managers outdid passive management.
Meantime, in January, while Vanguard noted that additional volatility appeared to be in the cards this year, for active management, it foresaw a bigger opportunity for it to strut its stuff.
The decisions of active sector and security selection should carry a bigger stick in a market holding its own against macroeconomic forces or taking a back seat to central banks.
Across most segments, appealing yields are attainable, including some of the best value in higher quality bonds. Even in the face of watered down economic conditions, it should hold its own.
Hey, naysayers – and don’t pretend you’re not paying attention -- on the heels of negative returns last year, in 2023, potentially, fixed income asset classes will come up with an improved total return performance, according to etftrends.com
In October and November, as risk markets hit the comeback trail in conjunction with indications that inflation was receding, positive momentum found its mojo. Those strides opened the gates for investors to sniff outside of interest rates that hit nosebleed levels -- even though market volatility probably isn’t headed for the door. That’s because the U.S. economy continues to pose challenges.
Given the Fed took actions that seduced rate hikes during 2022, U.S. Treasuries have up ticked big time. Consequently, the site stated, investors should contemplate a greater allocation of assets to the asset class.
Meantime, through passive investment strategies, investors still will be exposed to broad market beta, a trifecta these days of burgeoning inflation and interest rates along with greater dispersion across fixed income sectors and regions is the motherlode for skilled active management, according t0 wellington.com.