Displaying items by tag: yields

The Fed hiked rates at the latest FOMC meeting but they were partially forced to with just about every measure of inflation hitting 30-year highs. However, more importantly they project that the federal funds rate will hit 2.75% by the end of 2023. This may have been the first hike in years but it will be one of eleven if they want to hit that mark. The bond market is pessimistic as they not only are projecting less hikes, but slower growth as well. The yield curve is indicating inflation will be under control but it might be costly. Typically this means that the Fed won’t mean to hike as frequently as they are indicating. There has been a lot of action in the TIPS market and it is indicating they expect inflation to average just shy of 2.8% in the next decade.

Finsum: Markets are most likely right in this scenario and that fewer rate hikes will get inflation under control; hopefully the economy can take the hit.

2021 was a comeback year for active fixed Exchange Traded Funds. Driving this home was a huge set of inflows as they saw a tenth of inflows globally, many of these came from the US. That trend isn’t stopping as nearly 80% of investors are searching to expand that position in 2022. Many investors see active funds having an edge with global turmoil increasing, as Russia-Ukraine escalates, and there are many macro risks domestically. Additionally, investors are clamoring to buy more ESG ETFs in 2022 as this trend shows no signs of falling off.

Finsum: Markets were messy and pretty hard to predict in the aughts, but active management seems to have a leg up in picking tech growth as well as fixed income winners.

Bond yields have been on a rollercoaster and the market seems to be having trouble making up its mind about the direction. On the one hand investors are fearful over Fed rate hikes and, increasingly, how soaring oil prices will drive up inflation. On the other hand, there is an element of anxiety that the war in Ukraine might scuttle global growth, which would point towards lower yields in the future. Perhaps the worst outcome though is both: stagflation.

FINSUM: In our view, the whipsawing of yields is misguided. Oil is not a big enough component of the economy to cause inflation to spin out of control and if you compare the macro outlook of today to three weeks ago, it is clearly more bearish. Thus, we think yields will trend downward so long as this conflict continues.

Everyone and their dog has been pivoting to ultra-short duration pseudo-cash bond ETFs in the fixed income balance of their portfolio and this is causing a sell-off of lots of corporate bond ETFs. LQD saw its fifth day of outflows which set a pandemic era record. This brought together a total of $856 million in investor outflows. This is part of a blogger trend where sentiment around investment-grade bonds is weakening. However, it's not because they are less likely to pay back but more a reflection of investment-grade corporate debt generally having a longer duration, which is the risk investors don’t want with upcoming rate hikes.

Finsum: The risk premium hasn’t changed with corporate debt just the term structure risk. Fundamentally these bonds could still be in a good place.

More so than inflation, interest rate risk is the biggest factor in bond markets. If the Fed hikes and Yields rise then that will only lower the value of many bond ETFs. In response, many investors have turned to shorter-duration fixed income. However, the latest surge is off the charts. Lots of money is flowing into ultra-short cash like ETFs with the lowest duration treasuries. Investors are offloading even medium-duration treasuries in the five-three year window. PIMCO’s MINT saw almost $900 million in inflows setting a record week for the fund. Investors are just looking to store capital in the midst of all the interest rate risk in the economy right now.

FINSUM: It's unclear if one rate hike or two will send yields surging high enough, now might be the time to hold medium duration debt as a lot of the risk could be priced in.