Bonds: Total Market
Is there a little something something between bonds and James Bond?
Well, bonds, at least, are expected back this year, according to schwab.com.
James? Filming a movie somewhere. Yeah, yeah; unreliable as ever.
Thing is, in the aftermath of an extended period of low yields -- not to mention last year’s to eagerly forget price dip, three tries at what’s on the precipice of a comeback: returns in the fixed income market, according to the site.
So, why so upbeat about returns? It goes like this:
Both nominally and in reality, starting yields are the highest in years;
The bulk of the Fed tightening cycle has wrapped up; and
A deceleration of Inflation’s likely
Following a prolonged dry spell, the bond market’s replete with yields that – compared to other investments – are appealing. A portfolio consisting of bonds; and high quality at that, like Treasuries, can translate -- without an excessively long period – around 4% to 5%.
Bonds, explained Ted Stephenson, professor of Accounting and finance at George Brown College, continue to be part of a diversified investment portfolio – an indispensable one at that, according to usnews.com.
"Regardless of correlation, bonds have done well versus stocks in six out of seven historical recessions. Ultimately, the correlation between stocks and bonds is not as important as relative performance."
Based on Cerulli Associates' research analysis of mutual fund and exchange-traded product trends in January, institutional investors expect to increase allocations to active investment strategies. According to the data, while mutual funds lost $1.9 billion to start 2023, a few asset classes are generating positive inflows. For instance, taxable bond mutual funds added more than $15 billion of inflows during January, while municipal bond mutual funds added $7.7 billion during the month. This bucked the trend in 2022 in which outflows were $148.7 billion. The release from Cerulli stated, “The gap between active and passively managed funds hit new lows in December 2022; however, [the] Cerulli survey [shows], most institutional investors still want a majority of their portfolios to be actively managed. A noteworthy number of institutional investors indicate increasing their allocations to active strategies in equities (28%) and fixed income (20%).” The release also stated that “Although mutual funds closed 2022 on a “sour note,”—having dropped 4.5% in December—they have so far reversed course in 2023, with assets climbing 5.8% to $17.2 trillion.” The report noted that the data was based on a survey administrated in the second quarter of 2022.
Finsum:According to the results of a recent Cerulli Associates report, institutional investors plan to increase allocations to active strategies as taxable bond mutual funds and municipal bond mutual funds saw a combined $22.7 in inflows during January.
U.S. government and corporate bond ETFs took a hit in February, as Treasury yields rose due to continuing fears over high inflation. According to a February 28 note from Lawrence Gillum, fixed income strategist for LPL Financial, “While bonds are back, 2023 may be bumpy. We don’t think we’ll see another year like 2022 anytime soon, but despite the higher starting yield levels, we could see periods of negative returns.” For instance, according to FactSet data, the Vanguard Total Bond Market ETF (BND) fell 2.7% last month, while the iShares 20+ Treasury Bond ETF (TLT) dropped 4.9% in February. When bond yields rise, prices of debt fall. However, shorter-duration Treasury bonds fared much better than longer-term U.S. debt last month as investors adjusted their rate expectations. For example, the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) posted a small return of 0.3% in February. In addition, two-year Treasury yields, ended February at 4.795%, up from 0.730% at the end of 2021 as higher yields have been attracting investors after rates surged last year.
Finsum:While longer-duration bond ETFs faltered last month due to continuing fears over inflation, shorter-duration Treasury bond ETFs such as the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) fared much better.
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Following the bouncing…fixed income ETFs? On the heels of last year, during which fixed income funds took a licking, they’re rediscovering their mojo. That stems at least partially from an inverted yield curve, according to cnbc.com.
In January in alone? Well, bond exchange-traded funds accumulated $20 billion. By contrast, all of last year, the total came to around $200 billion in bonds.
“There’s now income within the fixed income ETFs that are available,” Todd Rosenbluth, head of research at VettaFi, told Mike Santoli on CNBC’s “ETF Edge.” “We’ve seen higher-quality investment-grade corporate bond ETFs. We’ve seen high-yield fixed income ETFs see inflows this year, as well as some of the safer products.”
A rebound, seems to be in -- of all places -- the air, for bonds this year, in bonds, according to schwab.com. The returns in the fixed income markets, according to schawb.com.
Despite a host of challenges – including a tumultuous global economy and an unstable U.S political climate, also a factor abroad – this year, there are opportunities for the bond market that translate into handsome yields for investors at lower risk than has been the case for years.
Volatility? For at least the immediate future, when it comes to the market, it seems to about the only stable thing going.
Volatility’s on pace to remain on the high side – with the volatility index averaging about 25, according to jpmorgan.com. As the Fed over squeezes into weaker fundamentals, the S&P’s expected to again test last year’s lows.
“In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery and pushing the S&P 500 to 4,200 by year-end 2023,” said Dubravko Lakos-Bujas, global head of Equity Macro Research at J.P. Morgan.
“We all know it’s been a tough year for investors. We’ve been through monetary tightening and persistent inflation across global economies,” said Ryan Murray, CFP, with Vanguard. “We’ve seen an unprecedented period of volatility in the bond market, where such fluctuations are highly unusual.”
Give the inherently unpredictability of markets, in the face of extreme volatility, shucking aside your long term plan will certainly cross the minds of investors, he noted. “But it’s important not to let emotions get the better of you or push you to make a reactive decision that could put your hard-earned savings at risk.
The strong demand for bonds this year has led to a windfall for BlackRock’s fixed-income exchange-traded funds. The fund giant has attracted more investor cash since U.S. rates started rising than all of its competitors combined. The inflows to fixed-income funds are being driven by regulatory changes and creative uses by wealth managers and other bond funds. Deborah Fuhr, the founder of the ETFGI consultancy, told FinancialTimes that “There have been significant changes about the way people think about fixed-income ETFs in the past year. We have seen large funds and asset managers put their portfolios in ETFs . . . rather than buying bonds and trying to manage them themselves.” Salim Ramji, BlackRock’s global head of ETF and index investments added, “We’re finding and expanding into all parts of the bond market in multiple different slices . . . Any part of the bond market that can be accessed through an ETF, we’re capturing that.” This includes ETFs such as IBTG, which only holds U.S. Treasury bonds maturing in 2026. Another fund is LQDB, which purely contains BBB-rated corporate bonds. These ETFs allow active fund managers to use them in different ways. For instance, some use a specific slice to tilt their portfolio either to longer or shorter-duration bonds, which depends on their view of the economy. Ramji also noted that BlackRock ETF users include nine of the ten largest active managers and eight of the ten largest U.S. insurance companies.
Finsum:As demand for fixed income increases, Blackrock has created ETFs that track a small slice of the bond market that active managers can use in a variety of ways.