Displaying items by tag: fixed income

Meantime, investors so far continue to quake over performance of fixed income assets.

The Fed’s expected to continue fueling interest rates not on through the second half of the year, but into next year as well, according to wellsfargo.com. Consequently, the degree of the yield curve inversion may top what had been the two cycles before.

Now, up to now for the year, a regular theme’s emerged: the trepidations among investors evolving around the performance of fixed income assets. Some of the top questions swirling in the noggins of fixed income investors that Wells identified: 

1. What is happening to bonds so far in 2022?
2. Why continue to invest in bonds?
3. Why is the Fed garnering so much attention this year?
4. What should investors expect from the remaining three Fed meetings of this year?
5. What does Fed quantitative tightening mean?

While some market activities are difficult project, one thing that can be pinpointed are long trends in fixed income investing, according to fi-desk.com. Why? Because we can see them and, among all fixed income managers, increasing rife with significance. 

Six trends they’re picking up on in the industry include Direct Indexing or Custom Indexing; Increased use of home office model portfolios; tax-loss harvesting in SMAs; truly optimizing rather than sequentially allocating; insisting on system interoperability; aggregating various data sources; and a shift in the Build vs. Buy debate.

--And these developments should be embraced, according to the site. “We believe these six trends are changing fixed income portfolio management for the better.”

For investors with assets in active bond mutual funds, there has never really been a time to implement tax-loss harvesting. Tax-loss harvesting is the process of selling securities at a loss to offset capital gains tax due on the sale of other securities. Until this year, investors had mostly experienced gains in their fixed income holdings tracing back to the 2008-2009 financial crisis. However, due to significant losses in fixed income this year, an opportunity has arisen for investors to transition their assets to ETFs through tax-loss harvesting. According to Morningstar Direct data, US fixed income funds have seen more than $205 billion in redemptions during the first half of the year. Sales in taxable bond ETFs, on the other hand, while slowing, still generated $53.8 billion in net inflows during the same period. This has set the stage for tax-loss selling out of mutual funds and into ETFs.

Finsum: Losses in active bond funds this year sets the stage for tax-loss harvesting into fixed income ETFs.

Markets are in turmoil which has investors looking for more secure options, but American bonds are a risky option with rising yields (falling prices), which means active international is in a good position. Over the last year, 82% of active bonds have outperformed, and while that doesn’t hold up in the long run the unique conditions put them in a good position. International bonds can offer less interest rate risk, already better yields, and comparable credit profiles. The added advantage of international active funds is investors can make hedges with currency trading which can allow investors to hedge or leverage for more potential gains.

Finsum: The Fed will continue to put pressure on both bonds and equities in the U.S., and investors need a backup plan.

Most fixed income ETFs used to be linked to passive tracking products in the bond market, that is until more recently. Rules Adopted by the US SEC have steered many investors to active fixed income by making it easier to launch new active ETFs. Active funds are attractive for ETF producers because they draw higher fees (about .2 percent) than active funds. This has led to an explosion in active fixed income. Active bond fund creation is growing at nearly double the rate of the rest of the ETF market, and investors are ready as well as 2021 saw a record pace of inflows. One big factor in shifting more investors into active fixed income is aging global demographics which are still searching for yield and income.

Finsum: The world’s aging population is creating a safe asset shortage and pushing bond prices higher.

February was a bad month for fixed income ETFs which saw $32.2 billion in outflows. This marks the third straight month in a row of outflows. However, fixed income wasn’t the only category suffering in February; many traditional funds like money markets and stock/mixed asset funds saw outflows as well. This is an overall bearish sentiment that is creeping across the market, and signals that investors are worried about future rate hikes for the Fed. However, alternative funds continue to be on a win streak as they had their strongest inflows in over a year and have 11 consecutive months of inflows.

Finsum: There is a stronger correlation with stocks and bonds than there was thirty years ago and many investors are turning away from bond funds in the face of volatility.