Displaying items by tag: bonds

Wednesday, 10 January 2024 03:43

Client Concerns Around Fixed Income

It’s an interesting time for fixed income given the recent rally and optimism around inflation falling enough to cause a change in Fed policy. In conversations with clients, Nicholas Bragdon, Lord Abbet’s Associate Investment Strategist, discussed some common themes that are emerging. 

 

The first is that many clients report feeling satisfied with earning 5% returns in deposits and have no desire to make a change. While returns on cash are the highest in decades, the same is true across the fixed income universe even in short-duration assets like short-term corporate debt. Historical data also shows that being overweight in cash leads to long-term underperformance while also leading to reinvestment risk in the event that the Fed does start cutting rates. 

 

Another common concern among clients is that they believe they will have sufficient time to make changes to their portfolio if the Fed does start cutting rates. However, history shows that it’s quite difficult to time these changes in rate policy. 

 

In fact, last year at this time, the consensus was for the economy to fall into a recession in the second-half of the year, leading the Fed to start cutting rates. In reality, markets are too efficient and will have already priced in a bulk of gains by the time the Fed actually starts easing. Thus, investors should consider moving from cash or short-duration fixed income into intermediate or longer-duration to take advantage of the changing environment.


Finsum: Fixed income markets are at an interesting place, following a strong rally to end the year amid anticipation of a change in monetary policy. Here are some common client concerns. 

 

Published in Wealth Management
Thursday, 28 December 2023 02:52

AllianceBernstein Launches 4 Fixed Income ETFs

AllianceBernstein launched 4 new fixed income ETFs. With these new issues, AllianceBernstein now has 7 active fixed income ETFs and a total of 12 ETFs. The firm entered the ETF market in 2022 with the Ultra Short Income ETF and the Tax-Aware Short Duration ETFs. These now have assets of $587 million and $290 million, respectively.

 

Two of the new ETFs - the Tax-Aware Intermediate Municipal and Tax-Aware Long Municipal - invest primarily in municipal bonds and have a 28-basis points expense ratio. Its other fixed income ETF launches are the Corporate Bond ETF and the Core Plus Bond ETF. The Corporate Bond ETF invests primarily in US dollar-denominated corporate debt issued by US and foreign companies. The Core Plus Bond ETF will invest primarily in corporate bonds and mortgage and asset-backed securities. These ETFs have an expense ratio of 30 and 33 basis points, respectively. 

 

As of December 1, active fixed income ETFs had a total of $169.8 billion in assets and $30.1 billion of net inflows according to Morningstar. In contrast, passive fixed income ETFs had total assets of $1.3 trillion and net inflows of $169.1 billion. The higher ratio of net inflows to assets for active fixed income indicates that the category is making up ground with passive fixed income.


Finsum: AllianceBernstein is launching 4 new active fixed income ETFs. Overall, active fixed income is much smaller than passive fixed income, but the gap is shrinking.

 

Published in Wealth Management
Friday, 22 December 2023 17:15

‘Say Yes to Bonds’: Morningstar

Morningstar Investment Management (MIM) shared its 2024 outlook for financial markets. It’s particularly bullish on fixed income due to attractive valuations, generous yields, and falling inflation. Within the asset class, it likes developed market bonds, emerging market debt, and inflation-linked fixed income. 

 

While it sees more upside for long-duration bonds, it sees value in shorter-duration bonds for more risk-averse investors especially given that geopolitical risk will likely remain elevated in 2024. However, the yield curve is inverted which is typically a leading indicator that rates, and inflation are going to trend lower. Both developments would be more favorable for longer-duration fixed income. 

 

It also sees bonds returning to their traditional role of dampening portfolio volatility by providing a hedge against equities and meaningful income to investors. Due to the rise in yields, investors no longer have to take on risks in search of income as they often did during the previous decade. 

 

In regard to corporate bonds, it sees downside risk in the event of a recession as they are ‘priced for a slowdown, not a recession’. MIM is also concerned that high rates could erode company fundamentals especially in an environment of declining revenue and earnings. Thus, it recommends keeping a close eye on credit spreads and high yield bonds


Finsum: Morningstar Investment Management shared its 2024 outlook. It’s bullish on fixed income, specifically long-duration government bonds but more cautious on corporate debt given the risk of an economic slowdown turning into a recession.

 

Published in Eq: Total Market
Friday, 22 December 2023 17:13

Fixed Income Should Outperform in 2024: Invesco

As the calendar turns to a new year, it’s an opportune time to check in how experts are thinking about various asset classes. According to Jason Bloom, Invesco’s head of fixed income and alternatives, the market has been overly defensive for the last 2 years. However, this attitude is now changing as the consensus increasingly believes that a soft landing is likely. 

 

Flows into fixed income have fluctuated with investor sentiment rather than in search of optimal returns. As a result, many investors may be missing out on opportunities and underexposed in the event of a rising market, he warned. 

 

Bloom added that, “The market has really been in this state of sort of almost living in a world that is very different from the truth and reality of the underlying economy. For almost two years now, we’ve been three months away from a recession. The market has been perfectly wrong in predicting a Fed rate cut six months from now for the last two years. That trend has been incredible.”

 

Bloom wants to continue positioning against the consensus by betting on the economy remaining healthier than expected, and the Fed cutting less than expected. He believes inflation will continue to moderate although the 2% target is more of a floor rather than a ceiling. Given this outlook, he favors high-yield and leveraged loans given that default rates are likely to stay low if the economy remains robust.   


Finsum: Invesco’s Jason Bloom is optimistic about fixed income in 2024. He recommends continuing to bet against the consensus trade by expecting a healthy economy in 2024 and fewer rate cuts than expected.

 

Published in Wealth Management
Friday, 22 December 2023 06:41

Insights From a Model Portfolio Manager

Nick Zamparelli, senior VP and CIO of Sequoia Financial Group, shared some insights from one of Sequoia’s model portfolio. In terms of allocations, 25% is liquid fixed income, 38% is liquid public equities, and 36% is alternatives which includes private credit, private equity, hedge funds, and real assets. He credits Sequoia’s success to mixing in illiquid investments to boost risk-adjusted returns. 

 

In terms of his outlook, the biggest challenge is on the fixed income side and when to move from short-duration assets to longer-duration ones. Many have been stung by being too early in expecting the Fed’s hiking cycle to force the economy into a recession. Instead, the economy proved to be more resilient than expected and yields kept trending higher for most of the year until recently.

 

Regardless, he sees opportunities in fixed income given that yields are sufficiently elevated to offer diversification and attractive returns. Additionally, he sees the asset class returning to its traditional role as offering diversification against equities. 

 

In terms of equities, Zamparelli sees upside for small cap stocks given that they have recently underperformed but history shows outperformance over longer periods of time. Another area of interest is international and emerging market equities which have underperformed for the last 16 years. He believes these stocks will benefit if the dollar weakens.

  


 

Finsum: Nick Zamparelli, the senior VP and CIO of Sequoia Financial Group, shared some insights from managing a 50/50 model portfolio including thoughts on fixed income and equities.

 

Published in Wealth Management
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