Displaying items by tag: bonds

The federal reserve is holding steady with interest rates, at least at the current time, but other central banks around the globe are cutting and other hiking, creating opportunities in fixed income. While this is certainly adding a level of depth to portfolio management that hasn’t been present often in the last decade, high yields indicate great returns in fixed income.

 

According to Goldman Sachs investors should consider upping their exposure to high quality fixed income, emphasizing active management due to unpredictable US monetary policy. Despite expectations of rate cuts, recent inflation data suggests a "higher for longer" environment, meaning higher rates may persist. 

 

As a result, US equities may still be attractive, but some investors are shifting towards fixed income to capitalize on strong yields, particularly in high-quality investment-grade bonds and structured products.


Finsum: Active investors continue to have an edge with disparate monetary policy actions around the globe. 

Published in Wealth Management

In its Q2 active fixed income commentary, Vanguard discussed lowering rate hike expectations for 2024 due to strong economic data, while inflation remains stubbornly above the Fed’s desired levels. 

Despite the odds of a soft landing declining, Vanguard’s base-case scenario is that the Fed is done hiking and will hold rates at these levels until later this year. A risk to the firm’s outlook is inflation lingering above 3%, which would spark discussion about the need for further rate hikes. 

It sees monetary policy as remaining data-dependent and notes that the Fed has limited room to maneuver. The central bank risks another surge in inflation by cutting rates too soon, but it also risks a prolonged recession by cutting rates too late. 

Despite this uncertainty, Vanguard believes that there will be opportunities amid higher market volatility. It recommends investors take advantage of locking in attractive yields for longer durations and sees potential for better risk-adjusted returns in bonds vs. equities. Over the next 5 years, Vanguard forecasts returns of 4.5% for stocks and 4.3% for bonds. However, bonds are expected to have one-third of the volatility of stocks at 5.2% vs. 15.8%. 


Finsum: Vanguard shared its quarterly active fixed income outlook. The firm is downgrading its expectations for rate cuts in 2024, given recent economic data. Instead, it sees more opportunities in other parts of the fixed-income market.

Published in Bonds: Total Market
Saturday, 18 May 2024 13:00

Fixed Income Sector Thriving

2024 has proven to be a year of relentless volatility for fixed income, given mixed signals about inflation, the economy, and monetary policy. However, there are plenty of opportunities to make money amid these conditions. 

A consequence of high rates is that the US government is expected to pay more than $1 trillion in interest to bondholders this year, which is more than double the average from the previous decade. Currently, all Treasury securities are yielding more than 4%, and due to elevated rates, investors have a higher margin of safety. This means that fixed income is once again a source of meaningful income for investors and serves as a counterweight to equities.

Deal flow also remains robust, which is a positive for underwriters and sponsors. According to Bloomberg, bankers who underwrite bond offerings are expected to see a 25% increase in bonuses. In terms of sales and trading, bonuses are expected to rise by 20%, compared to an increase of 5% to 15% for equities. 

Another trend in fixed income is the electronication of the bond market. Traditionally, bond trading has been done over the phone or through banks, which has resulted in illiquidity and less price discovery. 

Now, volume is moving to electronic bond exchanges, which is benefiting market makers like Citadel Securities and Jane Street. These firms are now making markets in government and corporate bonds. It’s estimated that 42% of investment-grade debt trades were electronic last year, compared to 31% in 2021.


Finsum: Entering the year, many were confident that Fed rate cuts would fuel a bull market in bonds. This has failed to materialize, but there have been opportunities in fixed income.

Published in Bonds: Total Market
Saturday, 18 May 2024 12:54

Fixed Income ETF Flows Pick Up in April

April was marked by a mean reversion as robust inflation data and continued economic resilience dampened expectations of Fed dovishness later this year. As a result, flows into equity ETFs dropped from $106 billion in March to $41 billion in April. 

In contrast, flows surged into fixed income ETFs, increasing more than 60% to $27.4 billion. Lower-risk government bond ETFs attracted the most inflows at $10.1 billion, which was the highest since October of last year. Within the category, short and intermediate-term Treasuries captured the most inflows. 

In the US, flows into fixed-income ETFs were greater than equity ETF flows, at $15.2 billion vs. $14.1 billion. Scott Chronert, the global head of ETF research at Citi, noted “US-listed ETF flows decelerated this month against a generally risk-off backdrop. Underlying trends also pointed to more cautious positioning. Fixed income led all asset classes, but the gains were skewed towards core products, shorter durations, and Treasuries.”

Until something material changes in regard to inflation or the economy, it’s likely that investors will continue to favor ETFs that benefit from short-term rates remaining higher for longer. 


Finsum: Fixed income inflows into ETFs sharply increased in April, while equity inflows declined. This was a downstream effect of reduced expectations of Fed rate cuts in the second half of the year due to an uptick in inflation.

Published in Bonds: Total Market

Active bond funds are essential for a well-diversified investment portfolio, providing income and cushioning against market downturns. In 2022, bonds demonstrated their resilience, with most fixed income categories performing better than the broader stock market. However, bond values are inversely related to interest rate changes, so with rates projected to rise, focusing on short- to intermediate-term bond ETFs is advisable. 

 

Active bond ETFs, such as Pimco’s Active Bond ETF (BOND), offer diversified exposure and professional management, helping investors navigate volatile markets. If you want to shorten the duration Pimco’s Enhanced Short Matruaity Active ESG ETF (EMNT) might provide a more robust alternative with ESG exposure. 

 

Despite higher costs, active management can be beneficial, especially in uncertain economic conditions, making these funds a strategic addition to long-term investment portfolios.


Finsum: Duration risk is especially important in this current climate and because interest rates could fall quickly in the next year depending on the Fed’s decisions.

Published in Wealth Management
Page 1 of 152

Contact Us

Newsletter

Subscribe

Subscribe to our daily newsletter

Top
We use cookies to improve our website. By continuing to use this website, you are giving consent to cookies being used. More details…