Displaying items by tag: fixed income

For Investment Week, Sarang Kulkarni, the Lead Portfolio Manager of the Vanguard Global Credit Bond Fund, shared some thoughts about active fixed income and the current state of markets. Overall, his goal is to identify and invest in the best credit opportunities to generate consistent, risk-adjusted returns over the long-term. He is agnostic in terms of geography, sector, duration, credit quality. Instead, the fund has a bottom-up approach with a bias towards value. 

Recently, the fund has been investing in European financials due to favorable valuations and an improving regulatory environment. Additionally, it sees improving credit trends in the consumer discretionary sector and believes there’s upside in the bonds of companies in this sector. 

In terms of its edge over other active managers, Kulkarni believes that other funds rely on betting on the direction of the bond market to ‘generate alpha’. Over the long-term, these strategies tend to underperform the benchmarks and can perform poorly in more volatile environments. 

In contrast, Vanguard seeks to generate alpha over an entire market cycle in a transparent way. It avoids beta even at the expense of short-term returns. The fund also seeks to replicate the risk-return profile of the asset class which is key to consistent, long-term performance.

Finsum: Sarang Kulkarni, the Lead Portfolio Manager of the Vanguard Global Credit Fund, shares some thoughts on active fixed income and what makes his fund unique relative to its competitors. 

A recent challenge for the market and economy has been the surge in long-term Treasury yields. It implies higher costs for borrowers and corporations and if it persists, would certainly lead to a spike in defaults at some point.

Some key factors behind the ascent are resilience in the economy and inflation, rate cut odds in 2023 being priced out, and expectations of increased Treasury supply in the coming months due to large deficits. 

Yet, there has been some relief in the fixed income market due to a series of dovish economic data. This includes the August nonfarm payrolls report, jobless claims, inflation, and consumer spending data. In essence, there were some who believed that the economy may have been entering a re-acceleration period as evidenced by the 10-year Treasury yield rising from 3.2% to 4.4% between April and August. 

Yet, this week’s economic data undermines this narrative. The August employment data shows that hiring is clearly slowing, wage gains are decelerating, and the unemployment rate ticked higher. The 10-year Treasury yield declined from 4.4% to 4.1% as the breakout gets faded. 

Just as those who were confident about a recession have continually been frustrated over the last couple of years, those who are looking for a re-acceleration of the economy are likely to be as well. 

Finsum: There was some relief for the fixed income market this week due to a series of dovish economic data which support the notion of continued economic deceleration.

Active fixed income ETFs are seeing strong inflows and a slew of new launches to capitalize on its increasing popularity. Some major drivers of demand are growing awareness and comfort from advisors and institutions, elevated yields, and outperformance on longer timeframes.

In addition to these secular drivers of demand, the asset class is benefitting from the current uncertainty around the economy and Fed policy. Active managers have more discretion in terms of duration and quality when selecting securities. This creates more alpha especially in a sideways market. 

The latest entrant in the active fixed income ETF space is Madison Investments which just launched the Madison Aggregate Bond ETF which invests in all types of bonds to generate superior long-term risk-adjusted performance. It believes that the fund will have lower risk than benchmarks in addition to income through risk-conscious investing. 

The ETF has an expense ratio of 0.40% and marks its third ETF launch and first fixed income ETF. It will be co-managed by Mike Sanders, the Head of Fixed Income, and Allen Olson, Portfolio Manager. The fund will hold between 100 and 500 securities with up to 10% in non-investment grade credit. Currently, it has an average duration of 6.3 years.

Finsum: Madison Investments launched the Madison Aggregate Bond ETF which is an active ETF that aims to have lower risk than benchmarks. 

Bonds tend to go down for two reasons - an increase in default risk and rising interest rates. This supports the idea that current weakness in bonds is primarily due to the increase in rates as the default rate remains quite low.

This combination of high rates and low defaults is the ideal environment for high yield fixed income. Investors can take advantage of elevated yields. As long as the economy stays resilient, the default risk will remain low. If the economy starts to weaken, the default risk will likely start ticking higher, but this would also prompt a loosening of Fed policy which would be a positive catalyst for fixed income. 

For Vettafi, Todd Rosenbluth shares 3 high yield fixed income ETFs that are worth considering. The iShares $ iBoxx High Yield Corporate Bond ETF (HYG) is the largest and most well-known. It pays a 5.7% yield and is composed mostly of B and BB-rated bonds. 

For investors who want more safety in terms of credit quality, the VanEck Fallen Angel High Yield Bond ETF (ANGL) pays a 5.0% yield and is composed of higher-quality bonds rated above BB. Rosenbluth points out that ANGL has seen particularly strong inflows in recent weeks. 

Finsum: High yield fixed income is generating interest among investors. Not surprising given elevated yields even despite low default rates. 

Most fixed income investors are waiting on a Fed pivot before getting aggressively bullish on long-duration fixed income. Others are studying economic data to see any indications of a slowdown which would presage a pivot and also push bonds higher.

However, they may be missing an opportunity in municipal bonds according to Columbia Investments. These are one way to take advantage of higher yields and the recent selloff in long-duration bonds. Further, they offer unique tax advantages especially when buying debt in your own state and/or municipality. Currently, the average yield for municipal debt is 3.5% which is quite generous considering its after-tax. 

This is above the historical average. Additionally, history shows that default rates are quite low with municipal debt. Finances at the state and local level remain quite solid, and there have been more upgrades than downgrades so far this year, indicating that finances continue to improve. 

This state of affairs is leading to lower supply for municipal debt. Whenever the Fed does decide to pivot, this is a key factor in why municipal debt is likely to outperform as demand will certainly surge. 

Finsum: Given the steep losses in fixed income over the past couple of months, many investors may be overlooking a very unique opportunity in municipal bonds.