Displaying items by tag: fixed income

Active fixed income ETFs are seeing strong inflows and a slew of new launches to capitalize on its increasing popularity. Some major drivers of demand are growing awareness and comfort from advisors and institutions, elevated yields, and outperformance on longer timeframes.

In addition to these secular drivers of demand, the asset class is benefitting from the current uncertainty around the economy and Fed policy. Active managers have more discretion in terms of duration and quality when selecting securities. This creates more alpha especially in a sideways market. 

The latest entrant in the active fixed income ETF space is Madison Investments which just launched the Madison Aggregate Bond ETF which invests in all types of bonds to generate superior long-term risk-adjusted performance. It believes that the fund will have lower risk than benchmarks in addition to income through risk-conscious investing. 

The ETF has an expense ratio of 0.40% and marks its third ETF launch and first fixed income ETF. It will be co-managed by Mike Sanders, the Head of Fixed Income, and Allen Olson, Portfolio Manager. The fund will hold between 100 and 500 securities with up to 10% in non-investment grade credit. Currently, it has an average duration of 6.3 years.

Finsum: Madison Investments launched the Madison Aggregate Bond ETF which is an active ETF that aims to have lower risk than benchmarks. 

Bonds tend to go down for two reasons - an increase in default risk and rising interest rates. This supports the idea that current weakness in bonds is primarily due to the increase in rates as the default rate remains quite low.

This combination of high rates and low defaults is the ideal environment for high yield fixed income. Investors can take advantage of elevated yields. As long as the economy stays resilient, the default risk will remain low. If the economy starts to weaken, the default risk will likely start ticking higher, but this would also prompt a loosening of Fed policy which would be a positive catalyst for fixed income. 

For Vettafi, Todd Rosenbluth shares 3 high yield fixed income ETFs that are worth considering. The iShares $ iBoxx High Yield Corporate Bond ETF (HYG) is the largest and most well-known. It pays a 5.7% yield and is composed mostly of B and BB-rated bonds. 

For investors who want more safety in terms of credit quality, the VanEck Fallen Angel High Yield Bond ETF (ANGL) pays a 5.0% yield and is composed of higher-quality bonds rated above BB. Rosenbluth points out that ANGL has seen particularly strong inflows in recent weeks. 

Finsum: High yield fixed income is generating interest among investors. Not surprising given elevated yields even despite low default rates. 

Most fixed income investors are waiting on a Fed pivot before getting aggressively bullish on long-duration fixed income. Others are studying economic data to see any indications of a slowdown which would presage a pivot and also push bonds higher.

However, they may be missing an opportunity in municipal bonds according to Columbia Investments. These are one way to take advantage of higher yields and the recent selloff in long-duration bonds. Further, they offer unique tax advantages especially when buying debt in your own state and/or municipality. Currently, the average yield for municipal debt is 3.5% which is quite generous considering its after-tax. 

This is above the historical average. Additionally, history shows that default rates are quite low with municipal debt. Finances at the state and local level remain quite solid, and there have been more upgrades than downgrades so far this year, indicating that finances continue to improve. 

This state of affairs is leading to lower supply for municipal debt. Whenever the Fed does decide to pivot, this is a key factor in why municipal debt is likely to outperform as demand will certainly surge. 

Finsum: Given the steep losses in fixed income over the past couple of months, many investors may be overlooking a very unique opportunity in municipal bonds. 

In an article for Vettafi, Ben Hernandez discusses why intermediate-term Treasuries could be the best option for fixed income investors given the current market environment. In recent months, long-term Treasuries have considerably weakened as it’s become increasingly clear that the Federal Reserve is not close to pivoting in terms of its rate policy.

This is primarily due to the economy continuing to avoid a recession, while data like the jobs market and consumer spending continue to indicate the economy is expanding. At the same time, the short-end offers generous yields but would underperform in the event that the Fed cuts rates. Another factor is that there is going to be high levels of Treasury supply hitting the market later this year as the government looks to fund its deficit.

Given that both ends of the curve have high levels of risk and uncertainty, investors should consider intermediate-term Treasuries to take advantage of elevated yields while reducing duration risk. 

Historically, these periods of ‘pause’ when the Fed is deliberating its next policy move tend to be volatile. This is even more the case this year given the runup in yields and uncertainty in political and macro arenas. 

Finsum: Intermediate-term Treasuries could be the best option for investors given the risks and uncertainty surrounding the short and long-end. 

In recent weeks, fixed income drifted lower due to concerns about Fed Chair Jerome Powell’s upcoming Jackson Hole speech, where he was expected to strike a hawkish tone given the economy continuing to expand at a moderate pace and inflation remaining well above desired levels. 

Powell did lean hawkish in his remarks but not enough to fuel further selling in bonds. Notably, he warned that the FOMC was prepared ‘to raise rates further’. However, he did temper this with constructive comments on the economy’s resilience and inflation’s path lower. Equity markets experienced strength following the remarks as the speech was less hawkish than expected.

The ultimate takeaway is that the Fed is still hawkish, considers inflation too high, and further hikes are on the table if necessary, but it’s less hawkish than a few months ago. Additionally, it sees the resilience of the economy and progress on the inflation front as reason to remain patient in its current stance which delays the idea that rate cuts are going to happen anytime soon. 

Thus, it’s not surprising to see odds for a rate hike later this year edge lower in addition to the odds of a rate cut in the first half of 2023. So far, the ‘higher for longer’ camp continues to be correct which is leading to weakness on the long-end and creating attractive opportunities on the short-end. 

Finsum: Fed Chair Jerome Powell gave his much awaited speech at Jackson Hole. He struck a relatively hawkish tone which was broadly in line with expectations.