Displaying items by tag: fixed income

In an article for Vettafi, Ben Hernandez discusses why intermediate-term Treasuries could be the best option for fixed income investors given the current market environment. In recent months, long-term Treasuries have considerably weakened as it’s become increasingly clear that the Federal Reserve is not close to pivoting in terms of its rate policy.

This is primarily due to the economy continuing to avoid a recession, while data like the jobs market and consumer spending continue to indicate the economy is expanding. At the same time, the short-end offers generous yields but would underperform in the event that the Fed cuts rates. Another factor is that there is going to be high levels of Treasury supply hitting the market later this year as the government looks to fund its deficit.

Given that both ends of the curve have high levels of risk and uncertainty, investors should consider intermediate-term Treasuries to take advantage of elevated yields while reducing duration risk. 

Historically, these periods of ‘pause’ when the Fed is deliberating its next policy move tend to be volatile. This is even more the case this year given the runup in yields and uncertainty in political and macro arenas. 

Finsum: Intermediate-term Treasuries could be the best option for investors given the risks and uncertainty surrounding the short and long-end. 

In recent weeks, fixed income drifted lower due to concerns about Fed Chair Jerome Powell’s upcoming Jackson Hole speech, where he was expected to strike a hawkish tone given the economy continuing to expand at a moderate pace and inflation remaining well above desired levels. 

Powell did lean hawkish in his remarks but not enough to fuel further selling in bonds. Notably, he warned that the FOMC was prepared ‘to raise rates further’. However, he did temper this with constructive comments on the economy’s resilience and inflation’s path lower. Equity markets experienced strength following the remarks as the speech was less hawkish than expected.

The ultimate takeaway is that the Fed is still hawkish, considers inflation too high, and further hikes are on the table if necessary, but it’s less hawkish than a few months ago. Additionally, it sees the resilience of the economy and progress on the inflation front as reason to remain patient in its current stance which delays the idea that rate cuts are going to happen anytime soon. 

Thus, it’s not surprising to see odds for a rate hike later this year edge lower in addition to the odds of a rate cut in the first half of 2023. So far, the ‘higher for longer’ camp continues to be correct which is leading to weakness on the long-end and creating attractive opportunities on the short-end. 

Finsum: Fed Chair Jerome Powell gave his much awaited speech at Jackson Hole. He struck a relatively hawkish tone which was broadly in line with expectations.

For Advisors’ Edge, Maddie Johnson discusses why fixed income ETFs have experienced strong growth in recent years, and why it should continue in the coming years. ETFs have been around for more than 30 years but have become ubiquitous in the last couple of decades.

Interestingly, the trend began with passive equity ETFs taking market share away from equity mutual funds due to offering lower costs and better returns over longer time periods. In the fixed income world, change was much slower but now we are starting to see fixed income ETFs outpace equity ETFs in terms of inflows. A major factor is that there are more options when it comes to actively managed ETFs. Additionally, investors seem to be favoring fixed income given an uncertain market environment and attractive yields. 

In the first half of the year, fixed income ETFs had inflows of $160.1 billion which dwarfed the $52.8 billion of inflows in fixed income ETFs. A major recipient of inflows have been short-duration bond funds which offer yield close to 5% in many cases. 

If the Fed does indicate that it’s ready to hit the ‘pause’ button rate hikes or actually start cutting then look for long-duration funds to start outperforming as investors look to lock in these higher levels of yield. 

Finsum: Fixed income ETFs have seen the majority of inflows in 2023 due to an uncertain market environment and high levels of yield. 

Active fixed income has underperformed for the last 4 quarters due to the sharp increase in rates and tightening of spreads. However, the asset class could be poised to outperform as the Fed pauses and offers the best way for investors to take advantage of higher yields according to Sage Advisors Chief Investment Officer Rob Williams. 

Williams sees the Fed’s current rate path as being data dependent. This period could last for several quarters and offers specific advantages for active fixed income given its ability to tap a wider variety of duration, sectors, and risk to generate alpha. 

Eventually, Williams sees the yield curve steepening as the Fed inevitably shifts from ‘pausing’ to cutting. This process is likely to be volatile given the underlying resilience of the economy and labor market, and active fixed income tends to outperform in volatile markets.  

Active managers also have the ability to identify value in the fixed income space to improve return and risk factors. Due to volatility compressing in 2023, spreads have also tightened as well. This means that security selection has a more meaningful impact on returns and risk. 

Finsum: Active fixed income offers specific advantages to investors that are especially relevant if the Fed is pausing rate hikes and remaining ‘data-dependent’. 

In Marketwatch, Christine Idzelis discusses with Blackrock’s Rick Rieder his current thinking about fixed income given the recent selloff in Treasurie. Rieder is the Chief Investment Officer of Fixed Income for Blackrock and also the manager of the Blackrock Flexible Income ETF, its recent active fixed income ETF launch. The fund offers a 7% yield and invests in a mix of government debt, corporate credit, and securitized assets. 

Since inception in late May, the ETF has generated a 1.2% total return. In contrast, popular bond ETFs like the iShares Core U.S. Aggregate Bond ETF and Vanguard Total Bond Market ETF are down about 2% over the same time period. He attributes his outperformance to keeping “interest-rate exposure low” with a duration of 2 years. 

The majority of weakness in the fixed income market in recent weeks has been concentrated in long-duration assets. He believes that active fixed income ETFs offer exposure to areas like mortgage-backed securities and high-yield bonds. Rieder also believes that active fixed income is best suited to navigate the current market environment which offers very attractive yields but performance is likely to be bifurcated as long as rates continue to rise.   

Finsum: Rick Rieder, the CIO of Blackrock Fixed Income and portfolio manager of its active fixed income ETF, shares his thoughts on the current macro environment and benefits of active fixed income.