Bonds: Total Market
Harbor believes it is important to look beyond common convention and cost when considering active versus index solutions within the U.S. large cap equity space. Read More
Science and technology have only recently begun to disrupt the active fixed income asset management industry. Does scientific fixed income investing represent the industry’s next frontier? Learn more
Throughout 2021 one of the biggest worries for investors, business owners, and policy makers has been the return of inflation…see the full story on our partner’s site
More...
Evergrande’s crisis has been all over the news in the last month, but it appears there is contagion in the high yield debt market. The bond market sell off, particularly from off-shore investors has spread to companies like Tencent and financial companies like Bank of Communication Hong Kong. This has pushed the ICE BofA Asian Dollar High Yield Corporate China Issuers Index to over 25%, which is the peak yield for the index since 2008. Sparking the yield climb is a combination of regulation, high leverage, and low liquidity. A bump in liquidity from the Chinese central bank has calmed domestic investors, but ultimately government policy will have to lighten up for yields to start to fall.
FINSUM: The endless regulation is spilling into the rest of the economy in China, and no amount of liquidity provisions will bring back outside investors. Rather, China needs to loosen the grip if they want to give companies a chance at refinancing their debt moving forward.
Strategists for Goldman Sachs, Christian Mueller Glissmann and Peter Openhiemer, say that government bonds are failing to meet the traditional hedging requirements and to consider higher cash and equity allocations. There is still a small negative equity/bond correlation and investors shouldn’t leave the traditional 60/40 split immediately. There are other reasons to allocate more to equity though such as a higher equity risk premia. Inflation is eating away very low yields, making cash a better relative investment, and rate volatility could be even higher in the upcoming Fed cycle. If bonds/equity correlation moves to zero then a balanced portfolio is futile and cash is the safer option.
FINSUM: Investors should need to watch the real return on their fixed income investments and high yield debt might not be worth the risk to generate the ‘normal’ bond returns.
The bond market boom has been bad for many fixed income investors, and debt is coming to term in a higher inflationary environment which is eating up all the return. However, bond market investors are turning to factor based investing to earn excess returns. Factor investing is a $700 billion market in equities, and it dwarfs the $25 billion dollar fixed income factor market. Factor investing modifies indices based on factors they think can give an edge over traditional indices. Active bond factor investing can outperform traditional indices in rising yield environments, but factor investing is looking to rival these active funds with systemic decisions. A ‘smart beta’ approach will look to outperform in high yield and emerging market debt.
FINSUM: The extensive literature on systemic fixed income is relatively small, and that's why smart beta strategies have failed to take off in the bond market like they have in equities.