Displaying items by tag: fixed income

Until a couple of months ago, the market’s consensus forecast was that inflation would gradually ebb lower as the Fed’s rate hikes would choke off economic activity, resulting in an inevitable recession. Needless to say, this scenario was very bullish for fixed income as it would let investors take advantage of higher yields and then profit from appreciation in bond prices.

Of course, reality had a different plan. Rather than a recession, we are seeing the economy continue to grow and add jobs. In fact, there is increasing evidence that the business cycle could be turning higher. Similarly, inflation has proven to be stickier than anticipated, and many believe we could be in a regime of ‘higher for longer’ inflation.

For ETF.com, Lisa Barr spoke to Monish Verma of Vardhan Wealth Management to get his insights on how to navigate this terrain. He believes that inflation will be structurally higher over the next decade which means more volatility in fixed income. 

In terms of duration, he likes the short-end at the moment but recommends tactically adding longer-duration closer to the end of the year as the Fed nears the end of its hiking cycle. He also recommends fixed income ETFs that are low-cost and diversified as offering the most upside. 

FinSum: Many fixed income investors were caught off guard when the economy and inflation proved to be more resilient than expected. Here are some strategies to consider if inflation continues to linger.

For Barron’s, Steve Garmhausen conducted a roundup of various financial advisors to get their input on the best strategy for fixed-income. Some of the factors to consider are where the Fed is in terms of rate hikes, is a recession imminent or will the economy continue to defy the skeptics, and will inflation continue to decline or will it plateau at an uncomfortably high level.

Yet, what is certain is that Treasury yields are at their highest level in decades. Further, investors can lock in positive real returns for many years given the jump in yields, coupled with the decline in inflation.

According to Matt Kishlansky of GenTrust, it’s a great time for investors to buy short-dated TIPS given the 3% coupon. This would outperform Treasuries as long as the inflation rate stays above 1.9%. And, he believes that inflation will prove to be much ‘stickier’ than consensus forecasts.

Thomas Salvino, the CEO of Performance Wealth, recommends building a ladder of Treasuries to lock in yields at different durations. Overall, he still believes the best way to build wealth is to build a portfolio of high-quality companies that are regularly increasing dividend payments. 

Finsum: Fixed-income is in the spotlight as investors and advisors look to lock in lofty Treasury yields. Barron’s asked some advisors on their best fixed-income strategy.

For Bloomberg, Hideyuki Sano shared some findings from an Invesco survey of sovereign wealth funds and central banks. Invesco surveyed 85 sovereign wealth funds and 57 central banks which manage a cumulative amount of $21 trillion.

The major takeaway is that the group is looking to increase allocations to fixed income and gold due to a combination of higher yields, increased geopolitical risk, and a shaky economic environment. They continue to see inflation as the biggest risk to returns and is one factor in their bullishness on gold. 

Interestingly, the sovereign wealth funds and central banks remain cautious on equities despite the strong rally over the last 9 months. In fact, many are looking to tweak their asset allocation models in order to increase exposure to fixed income as they look to take advantage of higher yields. 

Within the fixed income market, they were most bullish on emerging markets and high-yield. Compared to last year, there was a sharp rise in those who are bullish on private credit funds due to their strong performance over the past couple of years in a challenging environment. 

Finsum: Invesco conducted a survey of 85 sovereign wealth funds and 57 central banks. The major takeaway is increasing bullishness on fixed income and gold due to concerns about inflation and a potential recession.

For IFA Magazine, Sue Whitbread shared some commentary from Vanguard Active Fixed Income Perspectives. Overall, the firm remains bullish on the asset class although it anticipates continued, short-term volatility, but it is looking to add exposure on weakness. In total, the firm has about $445 billion in assets under management for its active fixed income strategies.

The firm notes that macro conditions have failed to deteriorate as anticipated given a string of better-than-expected data in terms of consumer spending, employment, and GDP. On top of this, Q1 earnings also beat analysts’ expectations as companies were able to pass on higher costs with minimal impact on demand. 

Cumulatively, all of these factors have led fixed income to weaken as the market prices in additional Fed rate hikes and prices out anticipated rate cuts at the beginning of next year. Over the past couple of months, the market has lifted its estimate for the terminal Fed funds rate to 6% from 5.5% previously.  

Going forward, the group continues to believe that tighter monetary policy and slowing growth will eventually materialize and provide a massive tailwind for bonds. Given the challenging environment, it advises patience and discipline. 

Finsum: Vanguard’s Active Fixed Income Group shared its perspectives on the global economy, interest rates, and the current state of the bond market.

In its midyear outlook for the fixed income market, UBS struck a bullish tone on mortgage-backed securities (MBS) but sees most of the fixed income market staying within the range from the first half of the year.

It believes the Fed will keep hiking rates until a terminal rate of 6% given the resilience of the economy. It ascribes the recent weakness in fixed income as a result of the market calibrating to this new reality rather than a recession in the second-half of the year.

Therefore, the market consensus that 2023 would be the year of fixed income has proven to be incorrect. Until the Fed begins cutting rates, fixed income markets face a significant headwind especially shorter-duration notes. Still, UBS remains cautious that as savings get depleted, higher rates could start to eat into consumer spending and other forms of economic activity. 

Given this challenging environment, UBS recommends MBS given the underlying strength of the housing market which has remained stable due to low supply and demand driven by demographics despite substantially higher mortgage rates. 

Finsum: UBS shared its midyear outlook for the fixed income market. It shared its economic outlook and why it’s bullish on MBS.