Displaying items by tag: fixed income

Earlier this year, PIMCO cited expectations that the Fed would start a series of rate cuts as one of its reasons to be bullish on fixed income. The asset manager is revising this view given the lack of progress on inflation and now sees rate cuts being delayed until the end of the year or even into 2025.

Following the latest FOMC meeting, PIMCO sees the Fed pursuing a policy similar to the 1990s, when the Fed held rates and allowed inflation to trend lower over time. Fed officials seem wary of the downside risks of further tightening and are willing to concede higher inflation in the near term. 

Despite a recent uptick in inflation, the Fed seems content to hold rates at steady levels. During his press conference, Chair Powell remarked that monetary policy was restrictive and that rates could be lowered if the labor market weakened. He added that a rate hike was ‘very unlikely’ and that the inflation in resurgence could be temporary due to seasonality and noise. 

While fixed income rallied following the FOMC meeting, PIMCO expects FOMC members to raise their inflation forecasts from 2.6% to 3% for core PCE at the upcoming meeting. The firm also sees an increased risk of no rate cuts this year if inflation data comes in closer to 3% than 2%.

Finsum: Following the latest FOMC meeting and hot inflation data, PIMCO is lowering the odds of a Fed rate cut in 2024. 

Prudential conducted a survey of 198 financial advisors to gain insight on how they are investing and constructing portfolios for retirees. 80% use separate portfolios that are specifically designed for retirees. Additionally, the use of targeted portfolios was higher among advisors who were more knowledgeable about planning for retirement. 

Another takeaway from the survey is that 50% of retirees prefer to live off of income from their portfolios. Thus, advisors need to ensure that their portfolios generate income for clients while balancing other factors like total return and diversification.

In terms of asset classes for retirement portfolios, advisors favored long-term fixed income, US large-cap stocks, and TIPS. Advisors who were more knowledgeable about retirement planning favored long-term bonds and TIPS to a greater degree than less knowledgeable advisors. 

The survey also showed that most advisors are constructing retirement portfolios themselves or with the assistance of third-party recommendations or allocators. Advisors with less knowledge about the subject were more likely to outsource portfolio construction. 

Most advisors are helping clients plan for retirement by optimizing for goals such as flexibility in spending or timeframe. This is in contrast to other approaches, which include using a bucket strategy or segmenting the portfolio into different strategies for different purposes.

Finsum: Prudential conducted a survey of financial advisors. Those with more knowledge about retirement planning favored long-term bonds and tend to use differentiated strategies.

State Street is bullish on fixed income. It believes that institutions should take advantage of attractive yields and that macro conditions are improving, albeit in an uneven fashion. Investors can achieve their diversification, return, and income goals without compromising on credit quality.

Many pensions have been able to close or shrink their funding gaps due to higher yields from Treasuries and investment-grade corporate debt. At current valuations, bonds are able to more effectively function as a hedge against weaker economic growth and serve as an effective hedge against equities. 

State Street sees the economy in a sideways period for rates and inflation. Therefore, it recommends that investors get long duration and see a more favorable environment eventually emerging for borrowers. It forecasts that inflation and Fed rates will end the year lower, providing a tailwind for fixed income.

In terms of active vs. passive strategies for fixed income, State Street takes a nuanced approach. It believes that in certain sectors, capable active managers have proven to add value. But this alpha has been shown to erode over time.

State Street has built a systematic approach towards fixed income which uses a rules-based approach. It weighs factors like value, sentiment, and momentum. It sees considerable benefits to increased electronic trading for fixed income, which has resulted in more data and liquidity. 

Finsum: State Street is bullish on fixed income due to attractive yields and an improving macro environment. In terms of active vs. passive fixed income, it takes a nuanced view.  

Stringer Asset Management shared some thoughts on fixed income, monetary policy, and the economy. The firm notes that while inflation has remained stubbornly above the Fed’s desired levels, it will move closer to the Fed’s target over time. One factor is that the M2 money supply is starting to decline, which is a leading indicator of inflation. Another is that fiscal stimulus effects are finally waning.

Thus, Stringer still sees rate cuts later this year, although it’s difficult to predict the timing and number of cuts, creating a challenging environment for bond investors. During this period of uncertainty, it favors active strategies to help reduce risk and capitalize on inefficiencies. Active managers are also better equipped to navigate a more dynamic environment full of risks, such as the upcoming election and a tenuous geopolitical situation.

Stringer recommends that investors diversify their holdings across the yield curve and credit risk factors. It favors a balance of riskier credit with Treasuries. This is because the firm expects the bond market to remain static until the Fed actually cuts. It’s also relatively optimistic for the economy given that household balance sheets are in good shape, corporate earnings remain strong, and the unemployment rate remains low. These conditions are conducive to a favorable environment for high-yield debt. 

Finsum: Stringer Asset Management believes that fixed income investors should pursue an active approach given various uncertainties around the economy, inflation, and monetary policy in addition to geopolitical risks.

Demand for US Treasuries continues to be strong despite high levels of issuance. According to the Treasury Department, foreign holdings of Treasuries saw their fifth monthly increase, reaching new highs.

As of the end of February, foreigners held $7.97 trillion of US Treasuries, nearly 9% higher than February 2023. Japan is the largest holder of Treasuries, outside of the US, at $1.17 trillion, which is the most since August 2022. 

However, some believe that the country may be looking to boost the value of its currency, as it hit a 34-year low against the dollar earlier this week. In 2022, Japan intervened in currency markets by selling dollars and buying the yen when it was at similar levels. As a result, its holdings declined by $131.6 billion due to these transactions. 

Another trend is that China’s holding of Treasuries continues to decline. The country held $775 billion in Treasuries, a decline of $22.7 billion from the previous month. This is the lowest amount since March 2009. 

Europe saw the biggest monthly increase of $27 billion and owns $320 billion in total. Great Britain also saw a $9 billion increase in Treasury holdings to reach $701 billion. 

Finsum: Despite recent volatility in US Treasuries, foreign holdings continue to rise. Japan remains the largest owner of Treasuries, while China continues to reduce its stake.