Displaying items by tag: fixed ncome

The last 40 years have been defined by lower inflation, creating a generous tailwind for fixed income. Now, AllianceBernstein believes that we are in the midst of a transition to a new regime that will feature lower growth and higher inflation. In this environment, the firm believes that fixed income investors need to make appropriate adjustments. 

It believes that inflation will be structurally higher in the coming decades due to deglobalization and demographics. Deglobalization means that supply chains will be reshored, undoing some of the deflationary trends of the last 40 years, and it will result in higher inflation due to greater manufacturing costs and wages. With an aging population, there is a smaller pool of available workers, which will also contribute to inflationary pressures. Both deglobalization and demographic trends will weigh on economic growth as well. 

Due to these factors, AllianceBernstein forecasts that 2% inflation is now the lower bound rather than a target. It believes that frequent spikes in inflation, as experienced from 2021 to 2022, will also become commonplace. This is a consequence of governments with large amounts of debt and future liabilities. Policymakers will be incentivized to ‘inflate’ away the debt rather than make painful cuts to spending. Additionally, lower rates will help contain financing costs.

Finsum: The last 40 years were great for fixed income due to inflation trending lower along with interest rates. AllianceBernstein believes this era is over, and we are moving into a new period defined by lower growth and higher inflation.

Todd Rosenbluth, the Head of Research for Vettafi, recently sat down with Joanna Gallegos, the co-founder of BondBloxx, about the state of the fixed income market and BondBloxx’s fixed income ETF offerings. BondBloxx is the only ETF issuer which specializes in fixed income.

Gallegos believes that the dynamic has shifted in a structural way for the asset class, following middling returns and yields over the past decade, amid a period of low rates and low inflation. Now, there is constant investor demand on the short-end of the curve given that yields are between 4% and 5% with minimal risk.

Demand is also quite strong on the long-end especially as many market participants are concerned that the economy is nearing a recession and inflationary pressures are abating as well.

However, Gallegos is not as concerned about a recession, believing that risks are already priced in. In fact, she recommends investors seek exposure to high-yield, corporate debt given elevated yields despite corporate balance sheets being in strong shape and sees upside in the event of an uptick in economic growth or easing of Fed policy.

Finsum: Joanna Gallegos is the co-founder of BondBloxx which is the only ETF issuer specializing in fixed income. She’s quite bullish on the asset class and sees the most upside in high-yield, corporate debt.