Displaying items by tag: high yield

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

2023 was an unprecedented year for interest rate volatility. The yield on the 10-year reached a low of 3.3% in April following the regional banking crisis, peaked at 5% in October, and finished the year at 3.8% following a series of supportive inflation data.

Given that inflation has declined to 3.1% which is nearly 70% less than the highest levels of 2021, the odds of a soft landing continue to rise. Currently, the Fed’s plan is to loosen financial conditions by lowering the Fed funds rate, while it continues to shrink its balance sheet.

Part of the plan should also be to reduce bond market volatility especially since it has doubled over the past 2 years and remains elevated relative to norms. In some respects, elevated bond market volatility is a consequence of the Fed’s battle against inflation. Now, it must also effectively deal with this issue before it becomes more substantial. 

Therefore, it’s likely that the Fed will cut back on its quantitative tightening program in which $95 billion worth of maturing bonds are not reinvested. Already, these efforts have succeeded in shrinking the Fed’s balance sheet by 15%. Another reason that curbing bond market volatility is necessary is that the Treasury will be auctioning off large amounts of notes and bills in the coming months. 


Finsum: The Federal Reserve has made significant strides in turning inflation lower. Now, it must take steps to reduce bond market volatility.

 

Published in Eq: Total Market
Tuesday, 09 January 2024 06:56

Yields Have Peaked: Schwab

2023 was a year of twists and turns for fixed income, although it ended with a big rally in the final months of the year. In 2024, Schwab Fixed Income strategist Collin Martin forecasts positive returns for the asset class and believes that yields have already peaked. Additionally, he notes that bonds are once again a diversifier against equities after an ‘anomalous’ 2022, especially at current yields. 

 

Despite believing that yields have peaked, he remains bullish on the asset class, noting attractive opportunities to generate substantial income. However, investors will need to be selective in terms of duration and quality. Martin recommends longer-duration securities to take advantage of higher yields even if yields are currently higher in CDs, bank deposits, or Treasury bills. This is because longer-term yields at 4% are quite attractive, and it negates interest rate risk in the event of Fed rate cuts. 

 

Martin added that investors should prioritize quality especially since there is no additional compensation for taking on risk in lower-rated or high-yield debt given current spreads. Therefore, stick to Treasuries or high-quality corporate debt which offer generous yields with minimal risk. Both would also outperform in the event that economic conditions further deteriorate. 


Finsum: Schwab is bullish on fixed income in 2024 although it believes that investors need to be selective in terms of quality and duration.

 

Published in Bonds: Total Market
Friday, 15 December 2023 06:16

ETFs Experiencing Major Inflows in Q4

A sizzling rally in stocks and bonds is leading investors to scoop up ETFs. In November, the iShares 20+ Yr. Treasury Bond ETF (TLT) was up 9.9%, while the Morningstar Global Markets Index, a gauge for global equities, was up 9.2%. 

 

The major driver of the rally is increased optimism about interest rates given positive news regarding inflation while the economy continues to avoid a recession. This means the biggest gains were found in interest-rate sensitive sectors which have been among the most battered since the Fed embarked on tightening policy early in 2022. 

 

There were also $110 billion inflows into US ETFs with $77 billion going into equities and $31 billion into fixed income ETFs. This was a 1.6% increase from last month and total ETF flows should easily exceed $500 billion, setting a new record. Fixed income ETFs saw a 2.2% growth rate on a monthly basis and inflows are up 14.3% compared to last year, exceeding equities’ growth rate of 5.6%. 

 

Active ETFs continue to grow and account for $21 billion of inflows. YTD, total inflows are $116 billion which exceeds $90 billion in 2022. Some areas of growth in the segment are alternative assets and inverse funds. 


Finsum: 2023 is set to be a record year in terms of ETF inflows. Fixed income ETFs and active funds are two of the biggest areas of growth. 

 

Published in Wealth Management
Friday, 15 December 2023 06:15

High Yield Bonds Starting to Attract Interest

High yield bond ETFs are seeing a surge of inflows as risk appetites reignite. In November, US-listed high yield bond ETFs had $10.8 billion of inflows which surpassed the previous record of $8.6 billion in April of 2020. The inflows in November were enough to offset the $8.7 billion of outflows in the previous 3 months. Globally, there was $127.5 billion of inflows into ETFs which was the highest amount since December 2021.

 

There was strength across certain parts of the fixed income complex as investment grade corporate bond ETFs saw $10 billion inflows which is the most since January. In contrast, Treasuries saw their lowest levels of inflows since January 2022. There was a sharp decline from the $30.4 billion inflows in October to just $4.3 billion in November, a reflection of the U-turn in sentiment. 

 

According to Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the Emea region, “Investors have cash to put to work, and if the assessment of the investment environment is better than expected, that dry powder can be put to work.” Another factor is that retail investors have many more low-cost options when it comes to high yield ETFs which seem like an ideal vehicle to take advantage of a ‘soft landing’ scenario which should be bullish for the asset class. 


Finsum: High yield ETFs saw a surge of inflows in November. Here are some of the reasons why the category should benefit from a soft landing. 

 

Published in Wealth Management
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