Displaying items by tag: bonds

Monday, 12 February 2024 05:18

Bonds Fall Following Blowout January Jobs Report

The US economy added 353,000 jobs in January which was well above analysts’ consensus estimate of a 185,000 increase. The positive news for the labor market continued as the November and December reports were also revised higher by a cumulative amount of 126,000. Average hourly earnings also surprised to the upside, coming in at 0.6% monthly and 4.6% annually vs expectations of 0.3% and 4.1%, respectively.

In response, stocks rallied, while bonds declined. The yield on the 10-year Treasury jumped 15 basis points with the curve slightly inverting as short-term Treasuries saw steeper losses. This isn’t too surprising as the strong labor market reduces concerns that the Fed is risking a recession by not cutting soon enough. Additionally, the central bank also pays close attention to wages as a major input into its inflation forecast.

 

Thus for fixed income, the report was negative in two ways. It implies that ‘higher for longer’ remains the status quo in terms of monetary policy especially as this was also the major takeaway from the recent FOMC meeting. The Fed’s stance would change if there was a sudden deterioration in economic conditions, or if inflation continues to move lower. The report makes it clear that neither scenario is close to fruition which means that this period of data-dependency and ‘higher for longer’ will continue.  


Finsum: The January jobs report blew past expectations in terms of jobs added and wages. In response, bonds dropped as the results reduce the odds of the Fed cutting rates at upcoming meetings. 

 

Published in Wealth Management
Friday, 09 February 2024 05:32

Time to Be Fully Invested in Fixed Income?

AllianceBernstein believes that the rally in fixed income will continue due to central banks cutting rates. Thus, investors should take advantage of the opportunity to lock in yields at these levels. 

 

The firm sees the Fed as remaining on hold until the second-half of the year. It sees the current environment as opportune given that rates will decline over the intermediate-term, while yields remain historically attractive in the interim. 

 

Despite expectations of slowing economic growth in the second-half of the year, AllianceBernstein isn’t concerned of a major downturn in the credit cycle as earnings remain robust, while household finances remain in strong shape despite some stress in recent months. 

 

Overall, the firm recommends that investors consider getting fully invested into fixed income especially given that many investors are in cash or short-duration bonds. This strategy made sense over the last couple of years but no longer does given where we are in the cycle. 

 

Instead, investors need to increase duration given its base case expectation of slowing economic growth and materially lower rates over the next 12 to 18 months. It also recommends corporate credit and securitized debt given attractive yields and solid fundamentals.


Finsum: AllianceBernstein is bullish on fixed income in 2024 due to its expectations that the Fed will cut and the economy will slow. It recommends taking advantage of yields while they remain high and extending duration.  

 

Published in Wealth Management
Tuesday, 06 February 2024 05:45

Fixed Income ETF Flows Favoring Longer Duration

The era of high yields has led to a significant boost of inflows into fixed income ETFs. Last year, short duration bond ETFs were the biggest recipient of inflows, but this started to change at the end of last year. Inflation started to move closer to the Fed’s 2% target, and the market began to price in rate cuts in 2024.

So, investors have been moving further out in the curve into intermediate and longer-duration fixed income ETFs to lock in yields for a longer period of time. One example of this can be seen in BondBloxx ETFs.

For instance, the BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF has seen $49 million of inflows YTD. This is more than 50% of net inflows over all of last year. In contrast, the BondBloxx Bloomberg Six Month Target Duration US Treasury ETF only has $17 million of net inflows YTD, while it had $904 million of inflows last year. 

BondBloxx has also seen similar flows from its 1 Year and 2 Year duration-focused Treasury ETFs. To appeal to fixed income investors seeking longer duration exposure, the firm recently launched 3 high-yield corporate bond ETFs with time frames of 1-5 years, 5-10 years, and more than 10 years. 


Finsum: Flows into fixed income ETFs remain strong in 2024, but one definite change is that investors are favoring intermediate and longer-duration ETFs in anticipation of the Fed cutting rates.    

 

Published in Bonds: Total Market
Thursday, 01 February 2024 04:19

Vanguard Launches 2 Municipal Bond ETFs

Vanguard is launching 2 new ETFs giving investors exposure to the municipal bond market. The Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC) launched on the CBOE BZX Exchange and are designed to offer targeted exposure to certain segments of the muni market with an emphasis on quality and yield. 

 

Both also have low expense ratios of 0.08%, making them among the least costly within the muni fixed income category. The intermediate-focused, tax-exempt ETF is particularly timely given expectations that interest rates will decline in 2024 due to a dovish Fed and weakening economic outlook. Thus, many investors are looking to lock in yields at these levels by moving out from the short-end into the intermediate and longer-end of the curve. 

 

In addition to quality and generous yields, municipal bonds also have tax benefits. While VTEI is designed to appeal to a wider swathe of investors, VTEC is for investors who want exposure to California municipal debt. The yield generated from this ETF is tax exempt at the federal and state level for California residents while also prioritizing credit quality. 


Finsum: Vanguard is launching 2 intermediate-term, municipal bond ETFs that offer investors tax benefits in addition to income and quality.  

 

Published in Wealth Management
Thursday, 25 January 2024 05:42

Dispersion in Fixed Income Performance in 2023

Taking a look back at the previous year can reveal some interesting lessons for fixed income investors. Overall, fixed income finished the year in the green as inflation finally started to ease. This led the Federal Reserve to pause interest rate hikes, and expectations are for it to start cutting rates sometime next year, resulting in the Bloomberg Aggregate US Bond ETF finishing up 5.5% last year. 

 

However, there was considerable variance in performance across the curve and within different sectors. The best-performing segment was CCC-rated corporate debt which finished the year up 20.1%. 

 

While the combination of low defaults and falling interest rates is a bullish combination for high-yield debt, this variance in performance also highlights the importance of selection. To this end, BondBloxx offers fixed income ETFs that target specific sectors and credit ratings. 

 

The BondBloxx CCC-Rated USD High Yield Corporate Bond ETF offers exposure to CCC-rated corporate debt. The firm also offers high-yield fixed income ETFs that provide exposure to specific sectors such as consumer cyclicals, or telecom, media & technology. In total, BondBloxx has 20 different ETFs with a cumulative total of $2.5 billion in assets. It’s known for its innovation in providing more targeted investment vehicles. 


Finsum: 2023 saw fixed income performance that was in-line with historical averages. However, there was considerable dispersion within the asset class. For instance, CCC-rated corporate debt finished the year up more than 20%. 

Published in Wealth Management
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