Displaying items by tag: yields

No matter where you look, fixed-income analysts are proclaiming 2023 as the year of the bond. But why will that be the case? According to fund firm Nuveen, “The anticipated rate decline, along with the higher starting yield, creates an attractive outlook for bonds this year.” The firm believes that the high starting yields this year could be setting the stage for a bond market comeback. According to Nuveen’s latest fixed-income report, over the last four and half decades, years that feature higher yields early on often produce higher returns by the end of the year. For example, in 1982, when the starting yield was 14.6 percent, the bond market gained 32.6 percent over the next 12 months. After consecutive rate hikes in 2022, the bond yield in early 2023 is at the highest level since the global financial crisis. The firm also believes that a slowdown in rate hikes could generate higher returns. While the Fed raised rates aggressively last year to curb inflation, it has indicated plans to move more gradually this year with recession fears growing. Since bond prices move inversely with yields, the firm says a drop in yields could create “potential price return opportunities.”

Finsum:Fund firm Nuveen is bullish on bonds this year due to an anticipated rate decline and a high starting yield.

Last year, portfolios that were allocated to 60% stocks and 40% bonds were hammered, as both the stock and bond markets sustained heavy losses. The portfolio has generally yielded steady gains with lower volatility since the two asset classes typically move in opposite directions. However, the strategy backfired last year after the Fed’s tightening policy sent stocks tumbling from record highs and drove Treasuries to the worst losses since the early ‘70s. This made advisors and investors question the viability of the 60/40 model. But the bond market’s selloff last year pushed yields so high that analysts at BlackRock, AQR Capital Management, and DoubleLine expect fixed-income securities to breathe new life into 60/40 portfolios. This year, both stocks and bonds have gained, propelling the 60/40 portfolio to the best start to a year since 1987. Their view is supported by the expectations that the Fed is nearing the end of its tightening policy as inflation comes down. If this view turns out to be correct, it reduces the risk of bond prices falling again and allows them to once again serve as a hedge against a potential drop in equities stemming from a recession. In a note to clients, Doug Longo, head of fixed-income strategists at Dimensional Fund Advisors, wrote “Expected returns in fixed income are the highest we’ve seen in years.”

Finsum:Based on the view that the Fed is nearing the end of its tightening cycle, analysts expect fixed-income securities to once again serve as a hedge against stocks in the 60/40 portfolio.

While leads are the lifeline for any advisor, having a great selling proposition can help put advisors over the top. One advisor, in particular, realized fixed income was becoming a key part of his growth. RBC financial advisor Aaron Howe, who’s known among his colleagues as “the equity guy,” found that getting more involved with fixed income is helping him to develop and strengthen relationships with clients. The timing certainly makes sense as yields on bonds have risen with the Fed pursuing a tighter monetary policy. Howe even leads with fixed income as he talks to prospects. He believes that it’s a “win-win.” His clients are more engaged when they hold bonds from the cities and states in which they live. It has also provided him with more touchpoints with his clients. Howe stated, “People often love buying a school bond because they feel a personal connection to the investment.” Fixed income has also allowed him to take advantage of the market. He stated, “Any opportunity you have with your client to show them you are doing something for them to take advantage of the current situation– whether it’s rebalancing or tax loss selling – that’s what they’ll remember down the road.”

Finsum:A financial advisor was able to grow his practice and get more engagement with clients by getting more involved with fixed income.

Investment advisor and banking solutions provider Save recently announced that it launched a savings product that is focused on ESG investing. The firm said in a recent press release that its "Market Savings program offers an option that provides a yield from iShares ESG Aware exchange-traded funds (ETFs) and other ETFs.” According to the press release, the ESG Market Savings portfolio aims to maximize environmental, social, and governance characteristics and exclude companies with certain practices. The release also said that since the launch of this ESG portfolio, about 10% of the people who have signed up for Market Savings have selected the Save ESG portfolio. Save Founder and CEO Michael Nelskyla said the following in the release, “Consumers are increasingly turning to ethical choices in all aspects of life including investments. We see it as our fiduciary responsibility to offer ethical investing through our Market Savings program for those consumers who seek these choices.” The Market Savings program on Save’s Savetech platform offers a yield that varies according to underlying market performance. It also noted that customer deposits are FDIC insured.

Finsum:Save announced that it launched an ESG Market Savings portfolio that aims to maximize environmental, social, and governance characteristics and exclude companies with certain practices.

Institutional investor portfolios are expected to look very different next year. For the first time in years, short-term government bonds are yielding more than 4 percent. This could lead to widespread changes in asset allocation, as investors won't have to allocate as much to equities. When rates were near zero, institutional investors had more stocks in their portfolios than they would have liked as a higher equity allocation brought on more risk. But now that yields are much higher, investors can once again allocate to fixed income. Even CDs are yielding nearly 4 percent. Mike Harris, president of the quantitative manager Quest Partners told Institutional Investor that “When central banks were printing money and forcing rates close to zero…people said, ‘We don’t want any fixed income in the portfolio,’ which is crazy to me. It’s been a building block of traditional portfolios for as long as I can remember. Investors were adamant about finding ‘somewhere else to park that capital,’ even if that meant taking on unwanted risk.” Now that bonds are much more appealing due to the higher yields, Harris expects that there are going to be some significant changes in asset allocation.

Finsum:A rise in yields for low-risk bonds could have major implications for institutional asset allocation next year.