Displaying items by tag: bonds

Tuesday, 24 October 2023 15:12

Why Allocators Are Favoring Active Fixed Income

Financial markets are increasingly complicated these days given the uncertainty regarding inflation, monetary policy, and the economy’s trajectory. For investors, the challenge is heightened as both equities and bonds have become increasingly correlated. In a piece for Pension & Investments, MFS Investment Management shared why active fixed income makes sense in this environment and detailed the firm’s approach.

 

According to Pilar Gomez-Bravo, the co-CIO of fixed income at MFS, “With this macro backdrop and the uncertainty around central bank policy, alpha generation from active management will be a more important factor for most fixed-income investors going forward.” 

 

With increased volatility, MFS recommends that fixed income investors ensure that they are sufficiently diversified to minimize risk by properly balancing duration and default risks. Its active management strategy is based on collaboration between its investment teams, consistency in its investment process, a focus on generating alpha throughout the cycle, and conviction in taking action when there are dislocations in the market.

 

Some other elements of the firm’s active fixed income approach is to manage and structure the portfolio to express a broad view and diversity of thought. Each portfolio is stress tested to ensure resilience, while the fixed income team stays connected to the equity team to get a holistic view of the markets and economy.


Finsum: Active fixed income is seeing a substantial increase in inflows given relatively high yields, while there is considerable uncertainty about the economy and monetary policy.

 

Published in Wealth Management
Tuesday, 24 October 2023 07:00

Flight to Quality in Front-End: Blackrock

The breakout in long-term yields has resulted in bonds turning negative on the year. Bonds could rally if the Fed does cut rates next year as anticipated by the market, but the rally would most likely be contained in the short-duration securities according to Blackrock’s Jeffrey Rosenberg. This would be a change from the long end as typically the best place to hedge against equities.

 

Rosenberg believes that the combination of higher Treasury supply and quantitative tightening will lead to upward pressure on long-term rates. The yield curve has become historically inverted which means that bonds would rally the hardest at the short end in the event of a rate cut. However, many passive benchmarks are overweight toward intermediate and long-term durations.

 

It’s also clear that there is a different relationship between stocks and bonds in a high rate, high inflation world. This has meant that fixed income is less effective as a source of diversification. However, this is most true with long-duration bonds. Short-duration bonds continue to work to diversify against equities especially as the Fed is likely to remain vigilant against longer-term inflation expectations rising even if it shifts on policy. 


Finsum: Blackrock’s Jeffrey Rosenberg details his outlook for active fixed income. He favors short-duration bonds given elevated volatility and the inverted yield curve. 

 

Published in Wealth Management

Inflows into fixed income ETFs have continued despite major losses in bonds over the last couple of months. Further, there is no clear indication when the tide will turn given expectations of high supply in the coming months and ambiguity about the economy, inflation, and Fed. 

 

The most liquid and popular bond ETF, the iShares 20+ Treasury ETF (TLT) has had $17.9 billion inflows so far this year. Assets under management have swelled to $41 billion as well. The biggest driver of flows is due to institutions, pension funds, and family offices that have a mandate regarding fixed income exposure.

 

Another factor driving demand is that yields are at their highest level in 16 years due to the Fed’s rate hikes. A longer-term trend that supports fixed income flows is that many investors and wealth managers are increasingly favoring ETFs over mutual funds due to lower costs and better liquidity. 

 

ETFs could also be better suited for volatile environments given that they can be used to harvest tax losses. Additionally intraday liquidity means that exposures can be shifted more easily to achieve precise targeting. 


Finsum: Fixed income ETFs continue to experience healthy flows despite significant volatility.

 

Published in Wealth Management
Saturday, 21 October 2023 03:11

Understanding Term Premium in Fixed Income

Stephen H. Dover, the Chief Market Strategist of Franklin Templeton, shared his thoughts on the rise in bond yields, and whether it should be feared. Higher yields do push up borrowing costs for corporations and households. 

 

And as long as yields stay elevated, global growth will be lower, profit expectations are squeezed, and there is greater risk to equities and credit markets. However, Dover attributes most of the increase in yields to rising term premiums rather than inflation or increased supply.

 

Term premiums are the additional yield that investors demand to hold onto longer-duration securities. Long-term rates are composed of 3 factors - inflation expectations, the neutral short-term interest rate path, and term premium. 

 

Since mid-July, the yield on the 10-year has advanced by more than 100 basis points. In contrast, the yield on the 2-year note is only up about 35 basis points over the same period. Notably, inflation expectations have moderated during that time frame as well, indicating that term premiums are to explain the surge in long-term yields. 

 

A major reason for the rise in term premiums is the removal of the ‘Fed put’ of the past decade, when central bank intervention was a constant through asset purchases and forward guidance. Overall, increased risk and volatility for long-duration bonds mean that investors need to be paid higher yields. 


Finsum: JPMorgan shared its Q4 fixed income outlook. Its two base-case scenarios are a recession and a period of below-trend growth. 

 

Published in Wealth Management

Yields on long-term Treasuries have broken out to 16 year highs. This has unleashed considerable volatility for bonds amid uncertainty about the economy’s trajectory and the Fed’s next move.

 

At the same time, many investors are looking to take advantage of this weakness and increase their exposure to the asset class especially with yields at such attractive levels. However, the current environment may be more suitable for active fixed income ETFs like the T. Rowe Price QM US Bond ETF (TAGG) rather than the typical passive options. 

 

Active managers have more freedom and flexibility when it comes to credit quality and duration, meaning they are able to take advantage of market inefficiencies. And, there are likely more inefficiencies in the current environment due to the cloudy economic and monetary outlook.

 

As an example, TAGG invests in investment-grade fixed income securities, including corporate and government debt and mortgage and asset-backed securities across all sorts of maturities. Additionally, TAGG still retains many of the benefits of passive strategies such as low costs and diversification. 


Finsum: The current environment is unusually uncertain and volatile for fixed income investors. Here is why active strategies are a better fit for the current environment.

 

Published in Wealth Management
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