Displaying items by tag: bonds

In a strategy piece for BNP Paribas, Daniel Morris and Olivier de Larouziere share some thoughts on the fixed income market and recent developments over the last couple of months which has resulted in them revising their outlook for the near and intermediate-terms.

The biggest surprise has been the resilience of the US economy in 2023 despite the Federal Reserve’s aggressive rate hikes. In essence, the odds of a ‘soft landing’ continue to tick higher as inflationary pressures continue to ebb in key areas. Recent weakness out of China is another indication that the global economy is decelerating, but it also has positive implications for inflation.

However, the Fed has not pivoted in terms of its policy given that inflation remains uncomfortably high in certain areas like services and wages. This, in concert with an economy that continues to expand, is the major reason why a Fed pivot is unlikely till sometime next year. 

BNP remains unsure about the terminal rate this cycle. But, it believes it will be higher than what they were forecasting a few months ago. One factor in this incorrect forecast is that the bank failed to account for the impact of higher government spending and large deficits which is also contributing to economic strength. 

Finsum: BNP Paribas shared its fixed income outlook for the rest of the year. Overall, the bank remains bullish but believes that any pivot in terms of Fed policy is not near. 

One of the biggest surprises of 2023 has been the resilience of the economy and inflation despite the Fed embarking on the most aggressive rate hike campaign in decades. For fixed income investors, it’s been a challenging environment. 

Inflows have been strong and sustained given higher rates and expectations that a recession was imminent. Yet, returns have been mixed especially with there being no change in the Fed’s stance despite some encouraging data on the inflation and economic fronts. Specifically, shorter duration bonds have outperformed, while longer duration bonds have underperformed.

According to Vanguard, it’s simply a case of short-term pain equating to longer-term gains. The selloff in fixed income will lead to higher returns over the intermediate and long-term while generating decent income for investors. Ironically, it’s an inverse of what we experienced over the past decade when bonds were in a decade-plus bull market due to the Fed’s dovish policies. In this environment, there was no value and limited income opportunities in the asset class. 

The firm recommends that investors have exposure to a mix of short and long-duration bonds. The factors that resulted in shorter duration outperformance are unlikely to continue especially given that the labor market is rapidly cooling and yields are at historically attractive levels. 

Finsum: Fixed income has been particularly challenging in 2023 due to the Fed continuing to hike rates. Here are Vanguard’s thoughts on how to navigate the market.

For Investment Week, Sarang Kulkarni, the Lead Portfolio Manager of the Vanguard Global Credit Bond Fund, shared some thoughts about active fixed income and the current state of markets. Overall, his goal is to identify and invest in the best credit opportunities to generate consistent, risk-adjusted returns over the long-term. He is agnostic in terms of geography, sector, duration, credit quality. Instead, the fund has a bottom-up approach with a bias towards value. 

Recently, the fund has been investing in European financials due to favorable valuations and an improving regulatory environment. Additionally, it sees improving credit trends in the consumer discretionary sector and believes there’s upside in the bonds of companies in this sector. 

In terms of its edge over other active managers, Kulkarni believes that other funds rely on betting on the direction of the bond market to ‘generate alpha’. Over the long-term, these strategies tend to underperform the benchmarks and can perform poorly in more volatile environments. 

In contrast, Vanguard seeks to generate alpha over an entire market cycle in a transparent way. It avoids beta even at the expense of short-term returns. The fund also seeks to replicate the risk-return profile of the asset class which is key to consistent, long-term performance.

Finsum: Sarang Kulkarni, the Lead Portfolio Manager of the Vanguard Global Credit Fund, shares some thoughts on active fixed income and what makes his fund unique relative to its competitors. 

Share and share alike?

Well, tell that to exchange traded funds. While they burgeoned in popularity, when it comes to sharing equally – or consistently – in the billions of dollars investors pluck down on them monthly, they don’t exactly participate, according to thinkadvisor.com.

An ETF focused on environmental, social and governance investing was one that trailed the pack. Year to date, it experienced the largest withdrawals. “(That suggests) that there may be some backlash against ESG from investors,” said Sumit Roy, senior ETF analyst at ETF.com.

In any event, as an investor, want a cost effective way to diversify your portfolios across various asset classes: you’ll get that from top ETFs, according to Investopedia.com. The work of ETFs, it seems, is never done. Not only does it track a particular index, sector or commodity and trade on a stock exchange, the way in which it goes about it mirrors that of a regular stock, putting investors in a position to wield greater flexibility.

A recent challenge for the market and economy has been the surge in long-term Treasury yields. It implies higher costs for borrowers and corporations and if it persists, would certainly lead to a spike in defaults at some point.

Some key factors behind the ascent are resilience in the economy and inflation, rate cut odds in 2023 being priced out, and expectations of increased Treasury supply in the coming months due to large deficits. 

Yet, there has been some relief in the fixed income market due to a series of dovish economic data. This includes the August nonfarm payrolls report, jobless claims, inflation, and consumer spending data. In essence, there were some who believed that the economy may have been entering a re-acceleration period as evidenced by the 10-year Treasury yield rising from 3.2% to 4.4% between April and August. 

Yet, this week’s economic data undermines this narrative. The August employment data shows that hiring is clearly slowing, wage gains are decelerating, and the unemployment rate ticked higher. The 10-year Treasury yield declined from 4.4% to 4.1% as the breakout gets faded. 

Just as those who were confident about a recession have continually been frustrated over the last couple of years, those who are looking for a re-acceleration of the economy are likely to be as well. 

Finsum: There was some relief for the fixed income market this week due to a series of dovish economic data which support the notion of continued economic deceleration.