Displaying items by tag: fixed income

Equity and fixed income markets were battered following the September FOMC meeting where the committee left rates unchanged but the committee members’ dot plots for the future trajectory of monetary policy and Chair Powell’s press conference had a decidedly hawkish tilt. 

The message was that another rate hike is likely before year end and that rates are likely to stay elevated for longer. Thus, Fed futures markets reduced the odds of rate cuts in 2024, leading to pain for the long-end of the fixed income complex. In contrast, the short-end of the curve saw major inflows as investors look to shield their portfolio from volatility and take advantage of high rates. 

Following the Fed meeting, there was $25.3 million of inflows into the iShares Treasury Floating Rate Bond ETF which was about 40% of the total inflows in the previous month. This marks an acceleration of a trend which began last quarter of outflows from longer-term Treasury ETFs and inflows into short-duration Treasury ETFs. 

Supporting this notion is the uncertainty over the economy and monetary policy as this tends to lead to volatility for long-duration assets. Additionally, the flatness of the yield curve means that there isn’t sufficient compensation for the additional duration risk.  

Finsum: Most of the fixed income complex suffered losses following the hawkish FOMC meeting, but one exception was short-duration Treasury ETFs. 

‘Higher for longer’ is the main takeaway from the FOMC meeting after the committee decided to hold rates. Members also signaled that another rate hike is likely before year end. Overall, there was a hawkish tilt to Chair Powell’s press conference as 2024 odds saw consensus expectations decline from 3 to 4 rate cuts to 2 to 3 cuts. 

FOMC members’ dot plots also show expectations of less easing in 2024. In June, it saw 2024 ending with rates at 4.6%. This was upped to 5.1%. The Fed did acknowledge progress in terms of inflation’s trajectory. Powell remarked that “We’re fairly close, we think, to where we need to get.”  

Fixed income weakened after the FOMC with yields on longer-term Treasuries jumping to new highs. Yields on the 10-year reached 4.48% and have broken out above the spring highs. The increase in yields has had negative effects on equities, specifically the financial sector and small caps. However, yields on shorter-term Treasuries haven’t risen above spring highs.

It’s an indication that markets are not expecting terminal rates to move materially higher but it’s adjusting to a longer duration of high rates. For fixed income investors, it likely means that volatility will persist in the short-term. 

Finsum: Longer-term Treasury yields are breaking out to new highs following the FOMC meeting. Expectations of meaningful Fed rate cuts in 2024 are being tempered. 

Direct indexing is a new approach to investing which involves recreating an index within an investors’ portfolio which combines the benefits of passive investing in addition to tax loss harvesting capabilities with the potential for increased customization. For these reasons, it’s been growing in popularity especially as it’s become available to a wider swathe of investors.

However, according to a recent report from Hearts & Wallets, a wealth management research firm, most investors remain unfamiliar with the concept. In fact, there is considerable confusion about what it specifically means. Many weren’t able to specifically delineate between ETFs and direct indexing.

Another challenge is that many investors believed that direct indexing was closer in approximation to active investing rather than passive investing and that it would require some sophisticated management. For those who were interested in direct indexing, the potential tax savings were the biggest factor. 

One of the conclusions of the report was that the industry should consider renaming ‘direct indexing’ to something that was more definitive. Too many investors who would be good candidates for these products are dismissive due to an incorrect understanding of its function and benefits. 

Finsum: Direct indexing is growing in popularity. Yet, a recent report on the category revealed some issues that may impede its future growth. 

Exxon Mobil recently shared its long-term outlook on how it sees the global energy market evolving. Overall, it sees renewables taking a greater share but that more than half of the world’s energy needs will continue to be met by oil & gas.

It sees energy demand as being intrinsically tied with economic development. By 2050, more than 1.5 billion people will have entered the global middle class which comes with increased consumption of automobiles, air conditioners, refrigerators, etc. 

China’s per-capita energy consumption more than pentupled as the country experienced an economic boom. The company sees a similar possibility in Africa over the next couple of decades. In total, it sees global electricity consumption growing by 80% by 2050.

In order to facilitate this, it believes that all types of energy need to play a role including oil & gas. Despite the belief of many that EVs portend a peak in oil demand, ExxonMobil points out that even if every car sold in 2035 is an EV, global oil demand would only drop to 85 million barrels per day which is equivalent to 2010 levels.  

Finsum: ExxonMobil shared its outlook for the global energy market till 2050. Overall, the company believes that energy demand will continue rising and that oil & gas will remain integral for the global economy.

For Bloomberg, Ye Xie covers the aftermath of a disastrous Treasury auction for buyers. A little less than 3 and a half years ago, the world and fixed income markets were in a much different place due to the pandemic and the Fed’s aggressive efforts to flood the market with liquidity. At the time, the 30-year Treasury was auctioned off at a yield of 1.2%, while it now fetches nearly 4.5%.

Thus, buyers of the 30Y have taken a huge loss. In recent weeks, it’s traded around fifty cents on the dollar. Typically, this would mean that holders are concerned about default risk, but this is not the case. Instead, the price is so low because buyers have to be sufficiently compensated given that they can get higher levels of income in so many places. 

Simply put, it’s an indication that these buyers essentially top-ticked the Treasury market. Longer-term Treasuries declined by nearly 30% in 2022 and have added to these losses this year as the Fed has remained hawkish for longer than expected. The holders of this specific note include the Fed, ETFs, pensions, and insurance companies. 

Finsum: The yield on the 30 year Treasury fell as low as 0.7% during the depths of the pandemic. Now, they are close to 4.5%.