It seems there’s not much, um, fixed, about fixed income. That’s because, pre tell, in the second half of the year, conditions there likely will be choppy, according to dayhagan.com.
Ongoing tightening by central banks in the developed markets is pushing up short term yields, while long term yields are feeling the weight of slower growth and a pull back in inflation seemingly on the horizon later this year.
Meantime, the fixed income allocation strategy experienced scant changes in sector allocations coming into the month.
Now, want to talk about a calorie burner? Presenting active, active and more of it.
As in, as if you had to ask, active management.
"Everywhere we turn, we are hearing that a new dawn is upon us, and it is once again the time for active management. Many would be surprised that I totally agree, said Jason Xavier, head of EMEA ETF Capital Markets at Franklin Templeton, according to global.beyondbullsandbears.com.
It could be argued – as outlined in his predictions for the year – that the decade of “cheap” money and unprecedented low interest rates are a thing of the past and that those with the chops to work the volatile markets will reap the benefits.
That said, the picture on the horizon boasts considerably more potential; in other words, the dawn of active fixed income in the exchange traded fund or ETF vehicle. Clinging to the assumption that ETFs are a passive vehicle – and passive vehicles only – is a myth, he continued.
Volatility’s not your game? You’re sure now?
Well then, to tamp down volatility in a portfolio – or generate steady income -- fixed income assets are popular alternatives to dividend stocks, according to money-usnews.com. And the assets pay out a defined stream of income.
It typically assumes the form of bonds, which, essentially, are IOUs investors can reach into their wallet for from a number of sources, like, for example, governments and corporations.
That said, bond investing isn’t as easy as one-two-….you get the ides. Instead, since individual bonds are traded over the counter and mucho calculation is required to price correctly, it can be complex.
"Given the higher risks and costs associated with portfolios of individual bonds, and the time they take to manage, most investors are better served by low-cost mutual funds and exchange-traded funds, or ETFs," said Chris Tidmore, senior manager at Vanguard's Investment Advisory Research Center in Wayne, Pennsylvania. "This is particularly true in the case of municipal and corporate bonds, which are less liquid and harder to purchase than Treasury bonds."
Meantime, this for U.S. investors in exchange traded funds: you might want to mull over taking the splash into medium-term fixed income ETFs. according to marketwatch.com. Why, you might ask? They could not only dispense “attractive carry,” they also could translate into a “buffer” against the volatile returns in the U.S. equity market. That’s in light of the fact that the Fed’s path toward interest rate hiking’s immersed in a lack of clarity, Gargi Chaudhuri, BlackRock’s head of iShares investment strategy for the Americas, said.
Going….going…..gone.
Nope; no precious four baggers here. Instead, ESG recently took something of a hit as the United Nations convened a climate alliance for insurers, according to reuters.com. A minimum of three additional departures – including the chair of the group – took place. What had them heading for the exits? Opposition from U.S. Republicans pols.
As of the time of this report, on May 25, that meant at least seven members of the Net-Zero Insurance Alliance had bid the group adieu, with five of the eight founding signatories included. NZIA was founded in 2021.
Over the past year, in terms of reaching decisions evolving around investments, negativity stemming from the contemplation of EGS factors has dominated the landscape, according to weforum.org.
The invasion of Ukraine, inflation and, in some parts of the world, a spike in populism, have aroused criticism surrounding ESG.
The caveat: integral to abetting the swing to a greener, more sustainable future hinges on investing that’s truly sustainable and, consequently, shouldn’t be shucked aside.
Even so, the period of negative scrutiny in so much as arriving at investment decisions generated by ESG factors, has been unprecedented.
In an article for Benzinga, Piero Cingari discussed the bear market in office REIT stocks as the vast majority are now trading at their all-time lows. It’s not entirely surprising given that workers are not returning to the office, following the pandemic, despite the best efforts of many employers.
As a result, many companies are giving up office space and/or choosing to move to a hybrid model. Of course, this has spillover effects on other areas such as the businesses that sell products and services to these workers.
In the first week of May, office occupancy in the 10 largest US cities was at half the levels that were seen prior to the pandemic. Many analysts had predicted that office occupancy would gradually ‘normalize’ just like so many other parts of the economy have done so. Yet, this isn’t the case and occupancy hasn’t risen over the last 6 months which is an indication that the changes may be permanent.
Adding to the sectors’ woes is higher rates leading to higher borrowing costs, heavy levels of short interest, and rising crime rates in many urban areas.
Finsum: Office REITs have been crushed amid high rates and corporations reducing office space with occupancy at 50% of pre-pandemic levels.
In an article for MarketWatch, Mike Murphy covered a recent report that state and federal regulators are examining unusual trading patterns behind the recent volatility in bank stocks. Notably, the entire banking sector and specifically regional banks, have been subject to heightened volatility and heavy short-selling in recent months following the failures of banks like Signature Bank, First Republic, and Silicon Valley Bank.
In recent weeks, there have been big declines and large amounts of put buying in the stocks of regional banks like PacWest, Western Alliance, and Zions. The core challenge for these banks is that they made long-term loans at much lower rates, yet they have to increase short-term deposit rates or risk depositors leaving for higher rates elsewhere. And the risk of this deposit flight increases if concerns about a bank’s financial health increases.
Both the White House and the SEC noted the short-selling pressure on banks possibly contributing to the volatility. In a statement, SEC Chair Gary Gensler said, “In times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation or the markets more broadly.”
Finsum: With increasing volatility in the banking sector, regulators and public officials are examining short-selling and put buying as factors that may be adding to volatility.
Um, fixed income investors seemingly were more than glad to host the going away party, according to JP Morgan.com.
That’s especially in the aftermath of one of the worse years on records for bonds. The culprit? Yep; the Fed, and its hyper active barrage of rate hikes. And, yes again, the last of it should spell stability this year to the bond market. That said, investor should bear in mind:
How far will the Fed go before concluding its rate hiking campaign?
How might credit perform in a year where both economic and profit growth are set to slow?
How will impaired liquidity impact price action?
Now, on one hand, of course, with volatility comes risk. But it also can be the land of opportunity, according to lazardassetmanagement.com. Consequently, investors shouldn’t duck and dodge fixed income like a bill collector but embrace the possible upside by going eye to eye and confronting volatility.
“In this unusual environment, we believe investors may want to move out of a passive mindset and consider investments beyond ‘plain vanilla’ bonds. By being creative, being active, and diversifying globally, investors can find fixed income solutions that may set up portfolios for the longer term with attractive return potential.”
Last month, investors must have spent more than a little time at their neighborhood ATM. After all, during that period, they poured $62.1 billion into ETFs, according to zacks.com.
That’s setting some pace, at that, considering it’s almost tripled February inflows, according to the BlackRock report. The first quarter net inflows as a result: $148.5 billion.
Fixed income ETFs fueled most of the inflows. Marking the largest gain since October, it hauled in approximately $38 billion.
Meantime, the Innovator, an outcome-based ETF issuer, recently was more than a little busy. It launched a unique suite of barrier ETFs that extends protection by scooping up U.S. Treasurys and selling equity options, according to cnbc.com.
“Advisors are realizing that bonds aren’t the safe haven that many thought they would be,” the firm’s CIO, Graham Day, told CNBC’s “ETF Edge.” “If you can pair [a barrier ETF] with the fixed income, it offers a tremendous amount of diversification benefits.”
And talk about two birds with one stone. These ETFs nip credit risk in the bud and yield liquidity every day, Day explained.
Volatility? Um, okay. What of it?
After all, yeah, sure, while it generates risk, it also can create opportunity, according to lazardassetmanagement.com. Meaning, rather than trying to circumvent it, fixed income investors should embrace it. Why exactly, you ponder? It’s because they could reap rewards from, like a scene straight out of the Wild West, looking it in the eye. No blinking, either.
In this atypical environment, the firm believes investors might want to abandon a passive mindset and chew over investments that leave “plain vanilla” bonds in the dust. Investors can come across fixed income solutions that have the potential to set up portfolios for the longer run by being creative and active. And don’t forget, mind you, diversifying globally.
Earlier in the year, etftrends.com reported that, potentially, fixed income classes could dispense better total return performance in 2023. That’s in the aftermath of a year riddled in negative returns that not only reset valuations – but to levels that seem more attractive. It’s especially so among investors with a more prolonged timeline.
American Century Investments recently launched a new actively managed fixed-income ETF targeting floating-rate debt securities. The American Century Multisector Floating Income ETF (FUSI) trades on the NYSE Arca and has an expense ratio of 0.27%. FUSI seeks to complement an investor's core bond holdings with current income, broad diversification, and the potential to mitigate the impact of rising rates. The ETF invests across various floating rate security segments including collateralized loan obligations (CLOs), commercial mortgages, residential mortgages, corporate credit, and other similarly structured investments. Plus, up to 35% of the portfolio may be allocated to high-yield securities including bank loans and other lower-rated floating-rate debt. Managers Charles Tan, Jason Greenblath, and Peter Van Gelderen build the ETF’s portfolio using a sector rotation approach that combines macroeconomic inputs, technical analysis of the relative value among various sectors, and fundamental research on individual securities. As part of the launch, Sandra Testani, Vice President of ETF Product and Strategy, stated, “FUSI compliments our current ETF income.” She also noted that “We believe a diversified floating rate mandate has the potential to mitigate downside risk and increase income, and we are excited to offer this on our ETF platform.”
Finsum:American Century recently launched the actively managed American Century Multisector Floating Income ETF (FUSI), which invests across various floating rate security segments such as CLOs, commercial mortgages, residential mortgages, and corporate credit.
Goldman Sachs Asset Management recently launched the Goldman Sachs Community Municipal Bond ETF (GMUN). The ETF, which trades on the NYSE Arca, seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Bloomberg Goldman Sachs Community Municipal Index, a rules-based index designed to track the municipal securities market with remaining maturities between one and 15 years. The ETF also has screens that consider certain social or environmental factors. By focusing on 1-to-15-year maturities within the investment grade municipal bond universe, the portfolio will seek to deliver diversified market exposure with lower duration and higher credit quality than the broader municipal market. The ETF is managed by Goldman’s Municipal Fixed Income team which brings decades of experience with an active and disciplined approach to investing in a market that is vast and fragmented. The fund has an expense ratio of 0.25%. According to Goldman, targeted allocation into municipalities and projects with positive impact will provide the opportunity to invest in education, healthcare, clean energy, and more community-related initiatives.
Finsum:Goldman recently launched its first muni ETF, the Goldman Sachs Community Municipal Bond ETF (GMUN), which provides exposure to tax-exempt municipal securities with remaining maturities between one and 15 years.
More...
Concerns over the banking sector are currently making things rough in the $8 trillion agency mortgage bond market. Agency mortgage bonds are widely held by banks, bond funds, and insurers as they are backed by mortgage loans from government-controlled lenders Fannie Mae and Freddie Mac. They are far less likely to default than most debt. They are also easy to buy and sell quickly, which is why they were Silicon Valley Bank’s biggest investment before its troubles. However, agency mortgage bonds are vulnerable to rising interest rates like all long-term bonds. This pushed their prices down last year and also saddled banks such as Silicon Valley Bank. In fact, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October last week, as climbing interest rates led to volatile global markets. According to bond fund managers, this certainly reflected fears that other regional banks might have to sell their holdings. When benchmark interest rates rise, bonds that were sold at times of lower rates lose value. For instance, prices of low-coupon agency mortgage bonds started dropping about a year ago, when the Fed raised interest rates to tame inflation and also indicated that it might start selling the mortgage bonds that it owned.
Finsum:With faltering banks such as Silicon Valley Bank holding large amounts of agency mortgage bonds, the turmoil in the banking industry is roiling the $8 trillion agency mortgage bond market.
Fixed-income professionals at Franklin Templeton and its affiliates expect fixed-income investments to be a safe haven from equities volatility since the financial markets are showing signs of stress. Tracy Chen, a portfolio manager at Brandywine Global, stated that “We believed something would break, even before this banking crisis happened. Now bonds provide safe haven protection for people’s portfolios because our timeline for recession is pulled forward because of this banking stress.” She recently spoke at a webinar on fixed-income mega-trends, entitled “Navigating Rates and Risk.” She was also joined by Jennifer Johnston, senior vice president and director of municipal bond research at Franklin Templeton, and Annabel Rudebeck, head of non-US corporate credit at Western Asset. Currently, yields are around 5% for corporates, which is considered attractive when compared to the longer-term history and government issuances. Johnston added that the tax-free attributes of municipal bonds provide an extra boost, while the muni market tends to be of higher quality than the corporate market. She stated, “We do see some opportunities, particularly out long, where munis are still relatively cheaper than where they’ve been in the past.” Chen also added that “This banking stress is very unique. It’s not driven by credit risk, but by mismanagement of duration.”
Finsum:With the financial markets showing stress, bond professionals at Franklin Templeton and its affiliates believe that fixed-income instruments provide a safe haven for the current stock volatility.
Bond volatility continued to explode last week due to growing contagion fears from U.S. banks. Last Monday, after a weekend in which the U.S. government intervened to protect depositors of Silicon Valley Bank and Signature Bank, the 2-year U.S. note yield experienced its biggest one-day fall since October 20th, 1987. Outside of U.S. hours, it dropped the most since 1982. That intraday drop of close to 60 basis points even exceeded the declines during the 2007-2009 financial crisis, the September 11th, 2001, terrorist attacks, and 1987’s Black Monday market crash. Gregory Staples, head of fixed income North America at DWS Group in New York told MarketWatch that the week’s decline in the 2-year U.S. yield came as the result of “de-risking of portfolios and draining of liquidity, stemming from concerns about the health of the U.S. banking system, exacerbated by questions about the future of Credit Suisse.” The ICE BofAML Move Index, which measures bond-market volatility, surged on Wednesday and Thursday to its highest levels since the fourth quarter of 2008, during the height of the Financial Crisis. Volatility then continued on Friday over concerns around First Republic Bank. This sent Treasury yields plunging, one day after they spiked on the news of a funding deal.
Finsum:Last week, the ICE BofAML Move Index, a measure of bond-market volatility, soared to its highest levels since the 2008 Financial Crisis as banking concerns continue.
Over the past two weeks, Treasuries have been considered a safe haven for investors amid the current turmoil in the banking system. While Monday offered a quick respite as investors learned of the news that UBS is rescuing Credit Suisse in a $3.24 billion deal, yields are expected to move lower in the days and weeks ahead if the turmoil continues. Kelsey Berro, a portfolio manager in J.P. Morgan Asset Management’s global fixed-income group told Barron’s that “The direction for Treasury yields should be lower." She added that “This month’s bank-related volatility shows that high-quality bonds are working as a portfolio diversifier this year.” Rick Bensignor, managing partner of Bensignor Investment Strategies concurs. He told Barron’s that he thinks Treasury prices will go higher, pushing yields lower. He says that he “Can see the 10-year Treasury’s yield falling to 3.2% or even 3.1%, compared with 3.48% on Monday afternoon.” Bensignor expects that “There will be more banks that are going to let us know how much trouble they are in. It’s going to force people into the safety of the bond market.”
Finsum:While Monday offered a brief respite, treasuries yields are expected to move lower if the upheaval in the banking system continues, according to bond strategists.