Displaying items by tag: fixed income

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. 

Active fixed income is one of the fastest growing categories in terms of inflows and new issues. It’s taking market share away from mutual funds and passive fixed income ETFs. Now, Vanguard is adding to its active fixed income ETF lineup with the launch of 2 new active fixed income ETFs for later this year.

The Vanguard Core Bond ETF and Vanguard Core-Plus Bond ETF provide exposure to a diversified portfolio of bonds across sectors, credit quality, and durations. The Core Bond ETF will focus on US securities with small allocations to higher-risk areas like high-yield credit and emerging market debt. The Core-Plus Bond ETF will have greater allocations to riskier parts of the fixed income market. Each has relatively low expenses at 0.10% and 0.20%, respectively.

Each of these has a mutual fund counterpart and will be managed by the same management teams, share benchmarks, and have the same costs. Yet, they are considered distinct products. It’s simply a reflection that a portion of investors, specifically younger investors, simply prefer the intraday liquidity and ease of these products vs mutual funds.

Active fixed income is also seeing greater interest due to the current uncertainty regarding monetary policy and the economy’s trajectory. Active managers have greater latitude and more flexibility to navigate this environment in contrast to passive funds. 

Finsum: Vanguard is launching 2 active fixed income ETFs which are based upon successful mutual funds. The active fixed income category is rapidly growing in terms of inflows and new issues.

Equity and fixed income markets were battered following the September FOMC meeting where the committee left rates unchanged but the committee members’ dot plots for the future trajectory of monetary policy and Chair Powell’s press conference had a decidedly hawkish tilt. 

The message was that another rate hike is likely before year end and that rates are likely to stay elevated for longer. Thus, Fed futures markets reduced the odds of rate cuts in 2024, leading to pain for the long-end of the fixed income complex. In contrast, the short-end of the curve saw major inflows as investors look to shield their portfolio from volatility and take advantage of high rates. 

Following the Fed meeting, there was $25.3 million of inflows into the iShares Treasury Floating Rate Bond ETF which was about 40% of the total inflows in the previous month. This marks an acceleration of a trend which began last quarter of outflows from longer-term Treasury ETFs and inflows into short-duration Treasury ETFs. 

Supporting this notion is the uncertainty over the economy and monetary policy as this tends to lead to volatility for long-duration assets. Additionally, the flatness of the yield curve means that there isn’t sufficient compensation for the additional duration risk.  

Finsum: Most of the fixed income complex suffered losses following the hawkish FOMC meeting, but one exception was short-duration Treasury ETFs. 

‘Higher for longer’ is the main takeaway from the FOMC meeting after the committee decided to hold rates. Members also signaled that another rate hike is likely before year end. Overall, there was a hawkish tilt to Chair Powell’s press conference as 2024 odds saw consensus expectations decline from 3 to 4 rate cuts to 2 to 3 cuts. 

FOMC members’ dot plots also show expectations of less easing in 2024. In June, it saw 2024 ending with rates at 4.6%. This was upped to 5.1%. The Fed did acknowledge progress in terms of inflation’s trajectory. Powell remarked that “We’re fairly close, we think, to where we need to get.”  

Fixed income weakened after the FOMC with yields on longer-term Treasuries jumping to new highs. Yields on the 10-year reached 4.48% and have broken out above the spring highs. The increase in yields has had negative effects on equities, specifically the financial sector and small caps. However, yields on shorter-term Treasuries haven’t risen above spring highs.

It’s an indication that markets are not expecting terminal rates to move materially higher but it’s adjusting to a longer duration of high rates. For fixed income investors, it likely means that volatility will persist in the short-term. 

Finsum: Longer-term Treasury yields are breaking out to new highs following the FOMC meeting. Expectations of meaningful Fed rate cuts in 2024 are being tempered.