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.

When stocks are down like they were last year, investors usually look towards treasuries for safety. But last year was unlike any other year. While the S&P 500 fell 18%, the Bloomberg U.S. Aggregate Bond index slumped 13%. However, a year like 2022 is unlikely to happen again any time soon. According to analysts, that leaves “room for those bonds to reclaim their role as a core risk-off allocation for asset owners this year.” For example, when SVB Financial Group recently announced hefty losses, the S&P 500 index fell 3.4% between March 8th and March 13th. But investors looking for a safe haven in long-dated Treasuries sent yields plunging, providing bondholders with a gain of more than 4%. Many analysts expect the conditions that led to close correlations between the stock and bond market “to prove ephemeral.” According to Jason Vaillancourt, global macro strategist with Putnam Investments, the biggest risk for those strong correlations is when "The Fed gets really fired up to fight inflation, as with the central bank's 'uh-oh' moment last year — when inflationary pressures it had deemed transitory proved anything but, forcing the central bank to shift aggressively to catch-up mode.” He added, “With the Fed frontloading its fight against inflation last year, the conditions required to maintain correlations at 1 this year are unlikely to persist.”


Finsum:With the Fed front-loading its fight against inflation last year, the conditions that led to a high correlation between the stock and bonds markets, aren’t likely to persist.

Vanguard recently expanded its tax-exempt bond ETF lineup with the launch of the Vanguard Short-Term Tax-Exempt Bond ETF (VTES), which is built to help investors earn consistent, tax-exempt income. The fund’s objective is to track the performance of the S&P 0-7 Year National AMT-Free Municipal Bond Index using a sampling technique to closely match key benchmark characteristics. The index measures the investment-grade segment of the U.S. municipal bond market with maturities between one month and 7 years. This is Vanguard’s first US-listed ETF launch in nearly two years. The ETF, which is managed by Vanguard Fixed Income Group, has been listed on NYSE Arca with an expense ratio of 0.07%. Sara Devereux, Global Head of Vanguard Fixed Income Group had this to say about the launch, “The Vanguard Short-Term Tax-Exempt Bond ETF is built to optimize tax efficiency for investors seeking to allocate to the shorter end of the municipal bond market. The new ETF complements our broad fixed income line-up and provides clients with another avenue to tap our municipal bond team’s talent and capabilities.”


Finsum:Vanguard expanded its tax-exempt bond ETF lineup with the launch of the Vanguard Short-Term Tax-Exempt Bond ETF (VTES), its first US-listed ETF launch in nearly two years.

Investors poured into U.S government bonds Monday after last week’s collapse of Silicon Valley Bank. This sent Treasury yields plunging. The 2-year Treasury yield was recently trading at 4.06%, down 100 basis points or a full percentage point, since Wednesday. This marks the largest three-day decline for the 2-yield since Oct. 22, 1987, when the yield fell 117 basis points. That move followed the October 19th, 1987 stock market crash, which is also known as “Black Monday.” The yield on the 10-year Treasury was down just under 20 basis points. Prices soared and yields fell after news of the collapse of Silicon Valley Bank. Regulators took over the bank on Friday after mass withdrawals on Thursday led to a bank run. Regulators announced on Sunday that they would guarantee Silicon Valley Bank’s depositors. With fears of contagion across the banking sector spiking, investors looked to government bonds for safety. Investors are also rethinking how aggressive the Federal Reserve will be with rate hikes after the bank’s collapse. This helped to send short-term yields lower. The Fed is meeting next week and was expected to raise rates for the ninth time since last March. However, Silicon Valley Bank’s collapse may change that. Goldman Sachs certainly thinks so. The investment bank no longer thinks the Fed will hike rates, citing “recent stress” in the financial sector.


Finsum:After Silicon Valley Bank’s recent collapse, fears of contagion across the banking sector spread, driving investors into Treasury bonds, which sent yields tumbling.

In a recent article for John Hancock’s Recent Viewpoints, Steve L. Deroian, Head of Asset Allocation Models and ETF Strategy offered his take on why active fixed-income ETFs provide value. Deroian noted that while active ETFs have slowly gained traction since they first appeared in 2008, there have been recent signs that investors are becoming more interested in gaining exposure to active management in ETFs. In fact, since 2008, the number of active fixed-income ETFs has grown exponentially. In John Hancock’s opinion, one factor behind the rapid growth is the changing composition of the U.S. bond market over the past ten years. Passive strategies have become much more concentrated in government debt. At the end of December, Treasuries accounted for over 40% of the Bloomberg U.S. Aggregate Bond Index, while the duration of the index has risen and is now at more than six years, indicating passive fixed-income ETFs carry a fair amount of interest-rate risk. Active fixed-income ETFs, on the other hand, aren’t required to track the benchmark. They can instead shift duration based on the manager’s outlook for interest rates. The management team can also manage sector allocation based on its ability to find relative value opportunities. Since the range of returns between fixed-income sectors can often be large, this creates an opportunity for active managers to add value over time.


Finsum:The number of active fixed-income ETFs has grown exponentially and John Hancock’s Steve L. Deroian believes one reason for that is the concentration of government debt in passive bond ETFs that carries a fair amount of interest-rate risk.

According to Morningstar's separate account/collective investment trust database, the top-performing fixed-income managers in 2022 managed to post positive returns during a historically tough year for the asset class. Five of the top 10 managers were in Morningstar's ultrashort bond category, while three were in the multisector bond category. The remaining two included one in the non-traditional bond category, and one, which was the top overall, in Morningstar's muni national long bond category. That top-performing strategy was the 16th Amendment Advisors LLC's Vicksburg strategy, which posted a gross return of 46.03% for the year. John J. Lee, a co-founder and managing member of the firm, said in an email to Pension & Investments, that the strategy benefited from a "cautious and bearish outlook on interest rates in general. Further, it took advantage of the disarray in the marketplace due to sharply rising rates and historically volatile markets." Lee said that it “holds investment-grade municipal bonds, corporate bonds, and their hedges in a strategy that is targeted to investors looking for non-correlated high-grade fixed-income exposure.” The second-ranked strategy was T. Rowe Price's dynamic global bond strategy, which returned 4.66% for the year. The strategy falls into Morningstar's non-traditional bond category and holds U.S. and international debt securities.


Finsum:According to Morningstar's SMA/CIT database, five of the top ten performing fixed-income managers were in the ultrashort bond category, three were in the multisector bond category, while the top two overall were in the muni national long bond category and the non-traditional bond category.

According to Investment Metrics' most recent fee analyzer report, active management fees dropped last year after underwhelming returns. U.S. fixed-income managers saw the largest reduction in fees, with a 7% average annual cut. In fact, post-negotiated fees for active managers decreased in most categories last year. The report was based on the analyses of almost 490 distinct accounts and co-mingled funds. According to Investment Metrics, the fee reduction trend appears to correspond to poor performance of active managers as most categories fell short of beating their standards. Scott Treacy, a research consultant at Investment Metrics, wrote the following in the report, “Normally, the fixed-income asset class protects investors when equity markets crater, but that did not happen in 2022.” He added, “Active U.S. fixed income disappointed in particular. Unfortunately, at a median level, active managers were not able to perform well in this environment.” While active managers had a chance to demonstrate that their expertise could shield portfolios during the downturn, the underwhelming results may put greater pressure on active strategies. Treacy concluded that “Those active managers that were not able to perform in the down market of 2022 will most likely see their assets go to passive strategies, or to other active managers that performed well in this difficult environment.”


Finsum:Active management fees dropped last year after managers produced underwhelming returns, with U.S. fixed-income managers seeing the largest reduction in fees.

One of the top financial stories in 2023 so far is the hot bond market. But it’s not just true for institutional investors, retail traders are also piling into bonds. One reason for this is that it has never been easier to buy Treasuries. They can be bought directly from the Treasury Department, at discount brokerages, or accessed through ETFs. It is also due to a huge shift in fixed income as rate expectations have sent yields on bonds to their highest in years. The 2-year, 10-year, and 30-year treasuries are all yielding around 4%. In fact, retail traders are so honed in on buying bonds, they've crashed the TreasuryDirect website repeatedly. Shawn Cruz, Head Trading Strategist at TD Ameritrade, recently told Yahoo Finance that “For pretty much the entire decade, leading up to this year, when people asked about retail and fixed income, I could just simply say, ‘no one really cares.’ The past year, that has significantly changed.” Sales of Treasury bills with maturities of one year or less through TreasuryDirect were $12.0 billion in January, a new record. BlackRock, the largest provider of ETFs by assets, has also benefited from this boom. So far in 2023, investors have poured $9.9 billion into U.S. iShares fixed-income ETFs.


Finsum:Retail traders are piling into bonds this year due to easier access to Treasuries and the highest bond yields in years.

Is there a little something something between bonds and James Bond?

Well, bonds, at least, are expected back this year, according to schwab.com

James? Filming a movie somewhere. Yeah, yeah; unreliable as ever.

Thing is, in the aftermath of an extended period of low yields -- not to mention last year’s to eagerly forget price dip, three tries at what’s on the precipice of a comeback: returns in the fixed income market, according to the site.

So, why so upbeat about returns? It goes like this:

Both nominally and in reality, starting yields are the highest in years;

The bulk of the Fed tightening cycle has wrapped up; and

A deceleration of Inflation’s likely

Following a prolonged dry spell, the bond market’s replete with yields that – compared to other investments – are appealing. A portfolio consisting of bonds; and high quality at that, like Treasuries, can translate -- without an excessively long period – around 4% to 5%.

Bonds, explained Ted Stephenson, professor of Accounting and finance at George Brown College, continue to be part of a diversified investment portfolio – an indispensable one at that, according to usnews.com.

"Regardless of correlation, bonds have done well versus stocks in six out of seven historical recessions. Ultimately, the correlation between stocks and bonds is not as important as relative performance."

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