Economy
Bond outflows are starting to slow as a response to rising rates and lower prices. The Fed’s hawkish policy stance has been elevating prices but now they are relatively attractive given the return. Previously bond prices were held purely as a safety net because yields on government debt generated no income, but rising rates are making them a competitive income option for those investors. In addition, more investors are looking for a way to mitigate volatility in these trying times, which has them shifting toward bonds and out of high-risk assets. Additionally, a whole new generation of investors are much more comfortable with ETFs and are thus turning to bond funds as their source of security.
Finsum: Bonds could make a comeback if inflows turn around they could be bottoming out price-wise.
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The Fed has begun its balance sheet reductions which those in the industry have labeled ‘quantitative tightening’. QT may be a leading cause of market volatility, as has historically been the case such as 2018. While the Fed poured trillions into the economy to mitigate the effects of the Covid-19 pandemic they are pumping the breaks as a response to rising inflation. One way to gauge the impact of these measures is surveys of consumer confidence which are at their lowest levels since the 2008 financial crisis as reported by the University of Michigan survey. Some experts think this won’t have a strong impact on the rampant inflation because many of the causes are symptoms of Covid related supply shortages. As a result investors are looking at various volatility based solutions to wade the Fed’s storm.
Finsum: The yield curve has begun to flash warning signs of a recession, but maybe the Fed can still orchestrate a soft landing.
It’s no secret bond funds have been on a track of suffering the last couple of months, but that might be turning around especially with mutual fund competitors. The counter cyclical effects of bonds and equities have broken down. In the month of May bond mutual fund outflows increased rapidly to over $90 billion, but bond ETFs saw an increase of $34 billion. Many mutual funds have been losing slowly over time to their ETF competitors. One of the complexing aspects of this relationship is that there has been a significant increase in active ETFs in the last couple of years. The Feds impact on interest rates have really shifted the traditional 60/40 portfolio because rising rates have contributed to the spiking volatility.
Finsum: The increase in active ETFs particularly for fixed income is a direct result of the macro alpha that is more prevalent than ever.