Displaying items by tag: duration

The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.

 

Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD. 

 

SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds. 

 

AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential. 


Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs. 

 

Published in Bonds: Total Market
Wednesday, 14 February 2024 03:23

Investing in Corporate Credit

Two ever-present risks for fixed income investors are credit risk and interest rate risk. Rising interest and default rates diminish the value of bonds and have to be considered especially with corporate bonds. 

 

However, some ETF issuers now offer corporate bond ETFs with less credit and interest rate risk such as the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG). It currently offers a 4.76% yield and invests primarily in short-term, corporate debt with an effective duration of 2.47 years. It’s notable that SFIG can offer such generous yields despite investing in high-quality debt with over 44% of holdings rated AA or A. 

 

Another potential catalyst for SFIG is when the Fed cut rates later this year. Currently, there are trillions on the sidelines in money market funds and some of this would migrate to funds with higher yields like SFIG.

 

According to BNP Paribas, another reason to be bullish on investment-grade corporate bonds is due to lower issuance and structurally, higher inflows. It sees less of a case for capital appreciation given the flat yield curve and recent rally, but it believes that yields at these levels are sufficiently attractive.


Finsum: Corporate bond investors have to be mindful of credit and interest rate risk. Investors can mitigate these factors with an ETF that invests in high-quality, short-term corporate debt.

 

Published in Bonds: Total Market

Entering the year, there was considerable optimism that the Fed could begin cutting rates as soon as March. However, the February FOMC meeting, recent inflation data, and the January jobs report have made it clear that the status quo of a data-dependent Fed, prevails. It’s clear that the Fed’s next move is to cut, but timing is the mystery.

 

This state of affairs means that the window for bond investors, seeking value, remains open. While recent developments have been bearish for bonds, investors have a chance to take advantage of higher yields if they are willing to live through near-term volatility. This is especially if they believe the Fed will cut rates later this year which will lift the whole asset class higher. 

 

According to Bloomberg, “The US economy is testing bond traders’ faith that the Federal Reserve will deliver a series of interest-rate cuts this year.” Investors can buy the dip with a broad bond fund like the Vanguard Total Bond Market Index Fund ETF, or they can search for more yield by taking on more credit risk with the Vanguard Short-Term Corporate Bond Index Fund ETF. Both have low expense ratios at 0.04% and 0.03%, respectively, and have dividend yields of 3.2%.  


Finsum: Bonds are experiencing a bout of weakness due to uncertainty about the timing and extent of the Fed’s rate cuts. Here’s why investors should consider buying the dip. 

 

Published in Bonds: Total Market
Monday, 12 February 2024 05:20

Vanguard’s Outlook for Active Fixed Income

In 2023, yields started where they ended, although there was considerable volatility in between. Notably, yields dropped sharply following the collapse of Silicon Valley Bank in the spring amid concerns that it would spark a greater crisis. And, yields spiked in autumn with the 10-year Treasury yield exceeding 5% following an uptick in inflation.

 

In hindsight, this marked the bottom for fixed income as the Bloomberg U.S. Aggregate Index gained nearly 10% between the end of October and the new year. Looking ahead, Vanguard believes this strong performance will continue in 2024. 

 

In terms of its outlook, it sees inflation ending the year just above the Fed’s 2% target. It believes the Fed will ease policy, although they don’t see rates returning to the same lows as the previous cycle. It also sees the yield curve steepening as short-term rates fall further. 

 

The firm also acknowledges some risks to its outlook such as the economy continuing to be bumpy even within the context of a slowdown which could lead to false signals. Credit spreads have remained tight which means that there is greater risk in the event of a recession. High deficits mean that Treasury supply will be plentiful, adding upwards pressure to yields. Finally, inflation could re-ignite especially given geopolitical risks and prevent the Fed from easing even if the economy warranted it. 


Finsum: Many active fixed income funds are being launched with a specialized focus on a particular niche. These funds have outperformed amid the volatility in the fixed income market. 

 

 

Published in Bonds: Total Market
Friday, 09 February 2024 05:32

Time to Be Fully Invested in Fixed Income?

AllianceBernstein believes that the rally in fixed income will continue due to central banks cutting rates. Thus, investors should take advantage of the opportunity to lock in yields at these levels. 

 

The firm sees the Fed as remaining on hold until the second-half of the year. It sees the current environment as opportune given that rates will decline over the intermediate-term, while yields remain historically attractive in the interim. 

 

Despite expectations of slowing economic growth in the second-half of the year, AllianceBernstein isn’t concerned of a major downturn in the credit cycle as earnings remain robust, while household finances remain in strong shape despite some stress in recent months. 

 

Overall, the firm recommends that investors consider getting fully invested into fixed income especially given that many investors are in cash or short-duration bonds. This strategy made sense over the last couple of years but no longer does given where we are in the cycle. 

 

Instead, investors need to increase duration given its base case expectation of slowing economic growth and materially lower rates over the next 12 to 18 months. It also recommends corporate credit and securitized debt given attractive yields and solid fundamentals.


Finsum: AllianceBernstein is bullish on fixed income in 2024 due to its expectations that the Fed will cut and the economy will slow. It recommends taking advantage of yields while they remain high and extending duration.  

 

Published in Wealth Management
Page 1 of 7

Contact Us

Newsletter

Subscribe

Subscribe to our daily newsletter

Top
We use cookies to improve our website. By continuing to use this website, you are giving consent to cookies being used. More details…