Displaying items by tag: bonds

It’s a challenging period for fixed income investors given uncertainties around the economic outlook and monetary policy. While some are making bold bets on whether inflation will perk up once again or the economy fall into a recession, CIBC recommends that investors embrace this period of ‘higher for longer’ by focusing on short duration and high quality bonds.

With this strategy, investors can take advantage of generous yields while shielding themselves from potential risks. In terms of the bank’s outlook, its base case remains a moderate slowdown and a mild recession. Yet, it believes that many of these risks have already been priced in which is one factor in its bullishness towards the asset class.

Due to recent data indicating a pullback in consumer spending, weakness in retail sales, and a slowdown in housing activity, the firm believes that recession is more likely than another period of spiking inflation. Further, credit card balances are rising, while excess savings from the pandemic have been basically depleted.

If this scenario were to materialize, inflation would likely trend lower which would give central banks more latitude to loosen policy and lead to price appreciation for fixed income. 

Finsum: CIBC shared some thoughts on the economy and fixed income. It’s bullish on the asset class as it believes a mild recession is likely next year.

If you’re tinkering with the idea of bonds, consider this: the challenges on the fixed income landscape, according to money.usnews.com. For those who aren’t initiated, individual bonds – which trade over the counter – it can be a tough road to hoe.

That’s where bonds funds come in. For investors, they’re an entrée to diversified bonds. And what about the complexities of direct bond investment? There are none.  

"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. "This is particularly true in the case of municipal and corporate bonds, which are less liquid and harder to purchase than Treasury bonds."

Meantime, calling it a day was Eric Needleman, global head of Fixed Income, who plans to do so by year’s end, according to an announcement by Stifel Financial Corp., reported yahoo.com.

"We are deeply grateful for Eric’s dedication, leadership, and the lasting impact he has made on our firm,” said Stifel Chairman and CEO Ron Kruszewski. “He set a standard of excellence that will continue to define Stifel's approach to the fixed income business.”

Within asset management, active fixed income is in a growth boom based on a surge of inflows and new issuances to meet this demand. There are two secular components as ETFs continue to displace mutual funds as preferred vehicles for fixed income investing, and institutions and advisors become more aware and comfortable with the category. 

And, a cyclical factor is the current market environment given the combination of attractive yields and uncertainty about the trajectory of monetary policy. These environments tend to favor active over passive strategies since active managers have more latitude in terms of credit quality and duration.

In recent months, we’ve seen a frenzy in terms of new issues with Vanguard and Blackrock introducing active ETFs that mirror their own active fixed income mutual funds. Now, Capital Group is joining the fray with the launches of the Capital Group Core Bond ETF (CGCB) and the Capital Group Short Duration Municipal Income ETF (CGSM). Asset managers are responding to demand for these products, or otherwise would lose market share to firms who provide ETF versions of popular mutual funds. 

CGCB invests across the entire fixed income spectrum with a focus on capital preservation and generating income. CGSM invests in municipal debt that is exempt from federal taxes and typically short-duration. 

Finsum: Capital Group is launching two new active fixed income ETFs which is a major trend in the asset management world. 

Despite a down Q3, retail investors continue piling into fixed income ETFs, both long and short-duration. They don’t seem too fazed by the recent hawkishness from the Fed or recent calls for continued strength in yields. 

Last week, inflows into the most popular Treasury ETF - the iShares 20+ Year Treasury Bond ETF (TLT) reached its highest levels since March 2020. In Q3, TLT was down 13%. This turned a small yearly gain into a more than 10% decline. Despite this performance, TLT has had $4 billion of inflows in Q3 and has seen short interest decline as well. 

Clearly, retail investors have a contrarian bent as many strategists are calling for further weakness in bonds, and Fed fund futures markets increased their odds of further hikes while decreasing odds of cuts in 2024. 

Some of the inflows into fixed income may be due to concerns about equities and economic growth given recent soft labor and consumption data over the last few weeks. THerefore, they may be looking to take advantage of the highest yields in decades and the potential for price appreciation in the event of a recession or further cooling of inflation. 

Finsum: Fixed income ETFs are seeing continued inflows despite poor performance in Q3. Here are why retail investors may be buying the dip.

Fixed income posted its worst quarterly performance in over a year as the market has been reducing odds of rate cuts, while increasing odds of additional hikes and extending its estimate of the duration of tight policy. This also led to the first quarterly decline in equities this year.

Yields on long-duration Treasuries are now at their highest level since 2007. Fed hawkishness is even neutering positive reactions to benign economic data as evidenced by the recent low PCE print. Fixed income was initially bid up, however this strength was sold into as most bonds finished the day unchanged. Some additional reasons may be the recent rise in oil which could handcuff the Fed from pivoting, huge supply of Treasuries hitting the market over the next couple of quarters, and uncertainty over the government shutdown. 

In terms of fixed income performance, short-duration assets are outperforming, while long-duration assets are hitting new lows. Many strategists are now saying that yields will rise further with the 10Y going past 5%. 

The contrarian case is that the Fed is close to the end of its tightening cycle and that the economy is finally starting to show signs of contraction. Thus, investors should buy on the dip to take advantage of these elevated yields.

Finsum: Fixed income and equities both performed poorly in Q3. For fixed income, here are some of the factors behind the weakness.