Displaying items by tag: fed

Yields on long-term Treasuries have broken out to 16 year highs. This has unleashed considerable volatility for bonds amid uncertainty about the economy’s trajectory and the Fed’s next move.

At the same time, many investors are looking to take advantage of this weakness and increase their exposure to the asset class especially with yields at such attractive levels. However, the current environment may be more suitable for active fixed income ETFs like the T. Rowe Price QM US Bond ETF (TAGG) rather than the typical passive options. 

Active managers have more freedom and flexibility when it comes to credit quality and duration, meaning they are able to take advantage of market inefficiencies. And, there are likely more inefficiencies in the current environment due to the cloudy economic and monetary outlook.

As an example, TAGG invests in investment-grade fixed income securities, including corporate and government debt and mortgage and asset-backed securities across all sorts of maturities. Additionally, TAGG still retains many of the benefits of passive strategies such as low costs and diversification. 

Finsum: The current environment is unusually uncertain and volatile for fixed income investors. Here is why active strategies are a better fit for the current environment.

2023 has been the year of active fixed income based on inflows and new issues. Nearly every asset manager has been jumping on the trend as we’ve seen launches from Blackrock, Capital Group, and Vanguard in the last couple of months.

The latest to join the fray is JPMorgan which announced the JPMorgan Active Bond ETF (JBND) which will trade on the New York Stock Exchange. The ETF will invest in a diversified portfolio of intermediate and long-term debt securities with a focus on securitized debt products. It seeks to differentiate itself with an emphasis on value through careful security selection and aims to outperform the benchmark, Bloomberg US Aggregate Bond Index, over a 3 to 5 year time frame. In addition, JBND has a cost basis of 30 basis points.

Active fixed income is benefitting from the current volatility and uncertainty regarding monetary policy. There’s also a fundamental shift in the wealth management space as institutions and advisors are more familiar with these types of products vs mutual funds. And, many younger advisors and investors prefer the ease and familiarity of the ETF structure vs mutual funds. Therefore, asset managers are introducing ETF versions of their most popular active fixed income funds. 

Finsum: Active fixed income continues to be a hot space with JPMorgan launching another offering. Here are some reasons for the category’s growing popularity.

JPMorgan shared its outlook for fixed income in Q4. Its two base case scenarios, each with 50% probability, are below-trend growth and a recession. The bank also cut the odds of a crisis to zero due to inflation pressures moderating. 

They believe the economy is on a soft-landing trajectory but warn that there are many similarities between a ‘soft landing’ and the early stages of a recession, meaning that investors should remain vigilant despite recent constructive developments. 

The major risk to the outlook is inflation re-igniting which could result in more hikes and extend the duration of hawkish monetary policy. The next few months may be a challenge due to the headwinds from a slowing economy and high rates. Therefore, JPMorgan recommends short-duration, securitized credit to take advantage of generous yields while minimizing duration and default risk.    

From a longer-term perspective, they see an opportunity to buy the dip in fixed income as both recessions and sub-trend growth environments are bullish for the asset class. There is uncertainty with regards to timing given that the Fed is in a ‘wait and see’ mode. Yet, history is clear that bonds will catch a strong bid once it’s evident that the Fed is done hiking. 

Finsum: JPMorgan shared its Q4 fixed income outlook. Its two base-case scenarios are a recession and a period of below-trend growth. 

The fixed income complex saw further losses following the September jobs report which showed that the US economy added nearly twice as many jobs than consensus expectations. Additionally, July and August payrolls were revised higher by a cumulative 119,000. In concert, this data refutes the notion that the jobs market is losing momentum.

The heaviest losses were felt in longer duration bonds, while shorter duration notes had mild weakness. This is a continuation of the major trend of the last couple of months which has seen the yield curve flatten due to a breakout in longer-term yields to the highest levels in 16 years. The major impetus for this move is the market reducing the odds of a recession and rate cuts in 2024 given that the economy has performed better than expected, while inflation has seemingly plateaued at high levels. 

The bullish case for fixed income rests on the economy or inflation rolling over. In terms of the economy, there certainly is evidence of decelaration but nothing to indicate sufficient contraction that would cause the Fed to pivot. Regarding inflation, there are some positives with moderation in wage growth and rents, however this has been offset by rising energy prices and concerns that the autoworkers strike will lead to an increase in used and new vehicle prices. 

Finsum: Fixed income was down following the September jobs report which was surprisingly positive further reducing the odds of a recession in the first half of 2024.

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.