Eq: Large Cap

Quantitative easing was the process of flooding the market with money in exchange for buying up long-term government debt and MBS; quantitative tightening was coined by Citigroup in order to describe the unwinding of this process. Goldman Sachs says this is causing increased volatility and sapping liquidity out of the treasury market. This QT could come with an abundance of arbitrage opportunities particularly in U.S. interest rate markets. Additionally, Goldman says QT will widen the gaps in new and old securities and narrow treasury yields and swap rates. F


INSUM: The treasury market is ripe for turmoil with the upcoming rate hike in March.

If the treasury market isn’t upside down it’s certainly moving there. Yields are rising which means prices are falling. The worst part is with inflation picking up there is a lot of room to move in longer-term treasury bonds. So where should investors turn to? Fallen angel bonds and their associated funds. Fallen angels are investment-grade bonds that have been recently downgraded to junk status. The biggest benefactor is that these relatively riskier bonds have a way higher return but there is less interest rate pass-through. That means as the Fed begins to strangle the government bond market the lower-grade corporate bonds won’t feel much of the pain. Many of these corporations have relatively strong balance sheets and the risk is overblown, so profits can recover quickly.


FINSUM: The fallen angel fixed income ETF market has an incredible yield advantage, and there is so much fiscal and monetary support that the risk is probably smaller than the yields are saying.

Active funds get overlooked by many investors in their retirement portfolios because investors view them with a certain amount of risk aversion. However, rising inflation and positive income expectation make them a viable investment alternative. For global diversity, investors should consider SPDR SSgA Global Allocation ETF and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF which have unique exposures. For those wanting to maintain fixed income exposure but better yield, First Trust Low Duration Opportunities ETF and First Trust Prefered Securities Income ETF are both debt-focused funds that are great for retirement. Active ETFs have a fee advantage over the often considered mutual funds.


FINSUM: These are great alternatives given the pending interest rate and inflation risk that are both permeating bond markets.

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