Displaying items by tag: fixed income

Something has shifted in the market following the softer than expected October CPI report. At one point this year, a recession in 2024 seemed like the consensus trade, especially following the failure of Silicon Valley Bank, stresses in the banking system, and fears that high rates would choke off growth. 

Now, the odds of a soft landing are rising. According to Robert Tipp, PGIM Fixed Income’s chief investment strategist, many seem to be aware of the historical context of previous soft landings. He cites 2018 and the mid-1990s as examples of rate hike cycles that didn’t result in a recession.

He believes that rising rates and tighter financial conditions are only recessionary, if economic growth is dependent on borrowing. He adds that “The excesses that would typically create a recession are simply not in existence. A lot of the expansions in the past were dependent on borrowing, but this time, it is a job growth driven organic expansion.” 

In contrast to previous borrowing-driven expansions, there is much less leverage. Financial institutions remain well-capitalized, household balance sheets are in solid standing, lending standards remain high, and there are no asset bubbles in sight. Adding to this is that the economy continues to add jobs while consumer spending remains firm on a real basis. 

Finsum: PGIM’s Robert Tipp believes that a soft landing outcome is likely. He points to the lack of leverage, historical instances, and firmness of the labor market and consumer spending as primary factors.

The October CPI report may have marked an inflection point for the Fed’s hiking cycle which is leading to inflows into fixed income ETFs. According to Andres Rincon, the Head of ETF Sales and Strategy at TD Securities, this is being driven by advisors, retail investors, and institutions with fixed income accounting for two-thirds of total ETF flows. 

The short-end accounts for 40% of these flows as investors look to take advantage of high rates with increased demand for Treasuries, HISA ETFs, money market ETFs, and ultra short-term bond ETFs. However, the very long-end is also attracting interest to provide a hedge against a decline in rates and the overall market. Rincon also noted a surge in demand for fixed income products from TD’s direct indexing channel which had been absent during the period of zero percent rates. 

Another trend that is supportive of fixed income ETF inflows is the conversion of popular mutual funds into ETF offerings. This is due to demand from institutions and advisors and advantages to the ETF structure in terms of liquidity and transparency. This is leading to more growth for the total ETF market as well. 

Finsum: Andres Rincon, the Head of ETF Sales and Strategy at TD Securities, notes that fixed income ETFs are seeing significant inflows due to a variety of reasons.

Virtus Investment Partners recently launched a new actively managed fixed income ETF that primarily invests in high-quality, short-duration debt from multiple sectors. The Virtus Newfleet Short Duration Core Plus Bond ETF (SDCP) intends to provide high levels of returns and income while limiting variance in net asset value. 

SDCP will also selectively invest in securities that are below investment-grade if yields are sufficiently attractive. It aims to achieve these goals through prudent risk management, a disciplined investment process, and finding opportunities in undervalued parts of the market. The fund will target securities with a duration between 1 and 3 years and will charge 35 basis points. 

SDCP’s subadvisors is Newfleet Asset Management which has considerable expertise in all parts of the fixed income market including newer, more niche, and out-of-favor sectors. It believes active sector rotation and risk management are keys to portfolio construction. 

Overall, SDCP’s launch is a continuation of a major theme in 2023 - the growth of fixed income ETFs. According to Todd Rosenbluth, the head of Research at VettaFI, fixed income ETFs comprise only 20% of the total market but account for 40% of inflows so far this year. 

Finsum: Virtus is launching a new short-duration focused active fixed income ETF with Newfleet Asset Management as an advisor. 

Homebuilder sentiment declined to 34 in November as mortgage rates rose for most of the month according to a survey by the National Association of Homebuilders (NAHB). Anything below 50 is indicative of poor sentiment, however there was some optimism that the recent decline in rates may lead to an improvement in conditions. 

Higher rates have stifled demand and increased the cost of financing for homebuilders and developers. Another headwind has been low inventories, resulting in less transactions. Overall, the survey results declined from 56 in July to its current level. However, the survey does not reflect the recent decline in rates following the soft October CPI report. 

All three components of the survey showed weakening with sales conditions falling 6 points to 40, sales expectations over the next 6 months dropping to 39 from 45, and buyer traffic declining from 26 to 21. 

According to Robert Dietz, NAHB’s chief economist, “While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months. In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%.” He believes that a decline in rates, coupled with low inventories, could set the stage for a rebound in sentiment. 

Finsum: November’s homebuilder sentiment survey report came out and showed a major decline. However, there is some optimism that the recent decline in rates could lead to a rebound in sentiment in the coming months.

The outlook for the financial markets and economy is quite murky given several uncertainties such as a slowing economy, high interest rates, inflation, trouble in the banking sector, and geopolitical risk. Adding to these woes has been the poor performance of bonds. Typically, they are a safe haven during periods of uncertainty and volatility. Yet, they have suffered losses and failed to provide sufficient diversification over the last couple of years.

Thus, many are looking at other asset classes to meet these needs such as fixed-indexed annuities. The rates on these annuities are tied to the performance of an index such as the S&P 500 with much less risk. They combine the security of a fixed annuity while having some upside like an index annuity.

Most fixed-indexed annuities are structured to provide 100% protection of the principal which is especially advantageous during a market downturn. In some ways, these are more secure than bank deposits given that there is a 100% financial reserve requirement for annuity issuers while banks have much lower reserve requirements on deposits.

However, there are some downsides to fixed-indexed annuities. Relative to bonds, there is much less liquidity, as most have some sort of limits on how much of the principal can be withdrawn without incurring a penalty. There are also higher fees than simply investing in a fixed income fund. 

Finsum: Fixed-indexed annuities may be a better fit for many investors than traditional bonds especially in the current environment.