Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are under duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.
Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.
There has been an explosion in active fixed income flows in the last year. The big drivers that are pushing investors in that direction are mainly macro, as the Treasury yields have risen (lowering bond values) and passive funds haven’t moved off them rapidly enough. The other big factor is that they have flat-out outperformed. Where active equity lagged their passive counterparts data shows that almost 9 in 10 active bond funds have outperformed in the intermediate range. Overall this drove the $350 billion influx in active fond funds last year. Additionally, there were tax advantages when it came to capital gains and this efficiency was prioritized by investors.
Finsum: It's clear that the information cycle in active equity is currently outpacing the ability to beat the market, but bonds' medium-term macro influence is more predictable for active management.
Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are on duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.
Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.
Investors have been flocking to strange corners of the fixed income market as pressures are rising from both the Fed and inflation. The latest place investors are finding relief is floating rate investment-grade corporate debt. Corporations were reluctant to create in the early stages of the pandemic to supply floating rate debt with yields near zero on government debt. However, there is a huge demand for floating-rate debt today, and large investment banks like JPMorgan, Morgan Stanley and Citigroup Inc. are all jumping into the investment-grade bond market. Floating rate risk allows investors to mitigate duration risk which with rate hikes pending is a potential threat.
Finsum: This could be just the start of the trend or there could be a lot more to come, but look for the less used avenues of the debt market to start to spark with fixed income in the place it's in.
Search 27,000+ Investments in Seconds
Imagine this: The Emerging Markets ETF you’ve used for the last 3 years has underperformed. You and (more importantly) your clients are growing tired of it.
How do you find new positions to swap it for? Google? Calling wholesalers? How much time will it take you to discover new options, and when you do, will they even be right for your clients?
Finally, I can offer you a better solution.
Compare Stocks to Funds to SMAs
You can now use Magnifi to search 27,000+ investments in seconds. It’s powered by AI and incredibly flexible. You can use phrases like “emerging markets with no exposure to China" or "global ETFs with low Fi360 scores" or even “tech funds with no FAANG stocks” to find and compare stocks, funds, models, and even SMAs that match exactly what you’re looking for.
And best of all, you can start using it today — with a free account.
Goldman Sachs lowered their most recent median projection for equities, putting the year-end target for the S&P 500 at 4,900. It's clear the markets hadn’t accurately priced in the Ukraine risk which could be worse in Goldman’s eyes than the 2014 Crimea annexation. Additionally, Goldman warned that if inflation continues to be worse than their expectations and faster rate hikes are needed the S&P 500 could decline by up to 12% to 3,900 by end of 2022, and if a recession occurs when the trough is lower yet. The best plays are in industrials and consumer discretionary, but still, energy leads the way.
Finsum: In lockstep with Goldman, a recession is a worst-case scenario. The TIPs market says inflation expectations are still moderate, so they shouldn’t overact to inflation.
Many investors are fretting over the rising bond yields which are sending their prices tumbling, but this could just be the tip of the iceberg. The aggregate bond index AGG has already fallen 3.9% and that's with the critical 10-year T-bill only rising to a 2% yield. If the 10-year hikes all the way up to its high of 3.25% in 2018 that could be a disaster. With inflation at a 40-year high that's a real possibility and any yield you are getting is all eaten away at. However, if inflation is temporary (caused by supply chains) or Fed pulls breaks fast enough then yields might be maxing out, and bond prices could turn around.
Finsum: Inflation expectations are remarkably low which means that investors are convinced either the Fed will credibly bring inflation down or as supply chains loosen that will bring inflation down. Markets are saying that bond risk is priced in.
Many investors are fretting over the rising bond yields which are sending their prices tumbling, but this could just be the tip of the iceberg. The aggregate bond index AGG has already fallen 3.9% and that's with the critical 10-year T-bill only rising to a 2% yield. If the 10-year hikes all the way up to its high of 3.25% in 2018 that could be a disaster. With inflation at a 40-year high that's a real possibility and any yield you are getting is all eaten away at. However, if inflation is temporary (caused by supply chains) or Fed pulls breaks fast enough then yields might be maxing out, and bond prices could turn around.
Finsum: Inflation expectations are remarkably low which means that investors are convinced either the Fed will credibly bring inflation down or as supply chains loosen that will bring inflation down. Markets are saying that bond risk is priced in.
Active management seems to be making a comeback, and adding to that rising rates have many investors eyeing fixed income. For overall active funds in 2020 and 2021, it was a nearly a 50/50 shot that they would outperform similar passive counterparts; in other words virtually no advantage. However, research shows that passive equity has an advantage but over the past 10-years active fixed income leads the way over passive funds. In the last decade, the average bond manager beat the Bloomberg Aggregate Bond Index nearly three-fifths of the time. However, fixed incomes risk mitigation isn’t captured here, and active funds have the advantage to adjust the risk factor over passive funds, carrying an additional advantage.
Finsum: The ultra-low interest rate environment has been the difference-maker for fixed income managers who have just capitalized better than passive funds.
Inflation surged to a nearly 40-year record high as the CPI index annual inflation pushed to 7.5%. This number was well above expectations and even core inflations 6% posting came in higher than consensus. In response, the Fed is going to tighten and do so significantly as regional Fed Presidents are expecting a 1% rise in the Fed Funds rate. This is a seriously hawkish turn and given there are only 3 more FOMC meetings with projections that would imply a 50-basis point rate hike possibility. The fed hasn’t hiked rates that quickly since the turn of the century. Investors are saying the Fed will want to hike by 50-basis points to keep its credibility.
Finsum: Hikes that steep could destroy the record recovery the US has had, it could lead to major windfalls in equities markets.
More...
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.
That's correct, Joe Biden’s latest economic rebrand is really a diet version Ronald Reagan era policy. In a recent statement, Joe Biden said that in response to inflation we can either “increase the supply of cars” or “reduce demand for cars by making Americans poorer”. This is essential supply-side economics made famous by the Reagan administration. Additionally, Yellen coined the term ‘modern supply-side’ economics just two weeks later in order to push the Build Back Better bill. This is a liberal tilt on aiding the weakening supply chains that will hopefully strengthen the economic recovery. It's a response to republicans’ attacks that BBB will surge debt and inflation.
FINSUM: The economy is in a difficult place, there is still catch up needed but undoubtedly Americans are feeling the force of inflation and another stimulus package could only further that problem.
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.
The fixed income ETF market took a hit in 2020, and it's been a very slow recovery. Still, active funds outperformed during this time period, and that trend could continue into 2022. A stand-out active bond ETF to consider is Fidelity Total Bond ETF. it’s seen stellar performance when compared to its peers and its managers are committed to ensuring liquidity. Another ETF to watch out for is Pimco enhanced Short Maturity Active ETF. This fund is more centered around stability and security with less risky management. However, avoiding high yield corporate debt and currency risk these factors can make it a safer alternative in the upcoming cycles.
FINSUM: Shorter duration active bond ETFs are really important to consider right now because they mitigate the single biggest risk that exists in bond markets: rising rates.