Displaying items by tag: bonds

The traditional perspective on direct indexing as solely an equity investing strategy is shifting, as highlighted by Jonathan Rocafort from Parametric Portfolio Associates, who advocates for its exploration in fixed income portfolios. 

Customized and tax-aware bond ladders present an intriguing opportunity, particularly for advisors with clients nearing retirement. While advisors are well-versed in tax-loss harvesting for equities, Rocafort notes a knowledge gap regarding tax-aware bond investing and the potential for tailored retirement income portfolios at scale. 

Direct indexing in equities involves purchasing individual stocks from an index, enabling tax optimization and customization beyond traditional funds. Similarly, managers can offer customizable bond ladders in municipal, corporate, or Treasury bonds, aligning with investors' values and tax strategies. Despite uncertainty in the interest rate cycle, there's optimism about utilizing fixed income strategies like bond ladders amid potential rate hikes in tax strategies.

Finsum: While it is still not the cheapest strategy, direct indexing could prove useful for HNW clients utilizing bonds as they near retirement.

Bond yields modestly rose following the February consumer price index (CPI) report which came in slightly hotter than expected. Overall, it confirms the status quo of the Fed continuing to hold rates ‘higher for longer’. Yields on the 10-year Treasury rose by 5.1 basis points to close at 4.16%, while the 2-Year note yield was up 5 basis points to close at 4.58%. 

The report showed that the CPI rose by 0.4% on a monthly basis and 3.2% annually. Economists were looking for a 0.4% monthly increase and 3.1% annual. While the headline figure was mostly in-line with expectations, Core CPI was hotter than expected at 3.8% vs 3.6% and 0.4% vs 0.3%. The largest contributors were energy which was up 2.6% and shelter at 0.4% which comprised 60% of the gain.

Based on recent comments by Chair Powell and other FOMC members, the Fed is unlikely to begin cutting unless inflation resumes dropping or there are signs of the labor market starting to crack. Current probabilities indicate that the Federal Reserve is likely to hold rates steady at the upcoming FOMC meeting, especially with no major economic data expected that could shift their thinking. 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short-end of the curve.

While the Federal Reserve has been successful in lowering inflation over the past 21 months, it still remains uncomfortably high. The consumer price index (CPI) peaked at 9.1% in June 2022 and reached 3.1% in its last reading which remains above the Fed’s 2% target.

Equally relevant, many of the disinflationary impulses which drove the rate of inflation lower have subsided, while there are indications of nascent inflationary pressures budding. For markets, the implication is that the status quo prevails with the Federal Reserve holding rates at 5.50% since July of last year.

While bonds enjoyed a decent rally as the Fed moved from hiking to holding steady, volatility remains elevated due to the current uncertainty about inflation and Fed policy. As a result, the bulk of gains in fixed income proved to be fleeting. According to John Hanock, these conditions are ideal for active fixed income as managers will be able to take advantage of inefficiencies and dislocations caused by the current environment.

The firm believes that active managers will be able to outperform by overweighting quality, intermediate-term bonds, and defensive sectors. It also likes mortgage-backed securities (MBS) due to attractive yields without sacrificing quality. In contrast, it wants to underweight cyclical sectors and high-yield bonds given its concerns about a weakening economy in the second-half of the year. 

Finsum: Volatility has risen for fixed income ever since the outlook for inflation and Fed policy have gotten murkier. Here’s why John Hancock believes active fixed income is the ideal way for investors to take advantage of attractive yields. 

The Bureau of Labor Statistics reported that the US added 275,000 jobs in February which was slightly higher than expectations. However, the report indicated some softening in the labor market as job gains in January and December were revised lower by a collective 167,000, and the unemployment rate inched higher to 3.9%. 

It resulted in bonds moving higher as odds increased that the Fed would cut rates in June. Additionally, the number of hikes expected in 2024 also rose from 3 to 4. Most strength was concentrated on the short-end, which is more sensitive to Fed policy as yields on the 2-Year Treasury note declined by 10 basis points. There was much less movement on the long-end as the 10-year Treasury yield was lower by 3 basis points. Earlier this week, bonds also caught a bid as Chair Powell’s testimony to Congress was interpreted as being dovish. 

Overall, the jobs report perpetuates the status quo in terms of the Fed remaining data-dependent, while the path of the economy and inflation remain ambiguous. On one hand, wages and the labor market have defied skeptics who were anticipating a downturn. But there has been acute weakness in areas like manufacturing and services which have historically coincided with a weakening economy. 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short end of the curve.

Recent bond market volatility has caused discomfort for fixed-income investors, but it presents an opportunity for active management to potentially enhance returns. 

Despite efforts by the U.S. Federal Reserve to tighten monetary policy and curb inflation, uncertainty remains as to the future direction of interest rates. This uncertainty has led to fluctuations in bond yields, creating both challenges and opportunities for investors. 

By focusing on quality and liquidity, particularly in areas such as agency mortgage-backed securities, active managers can navigate these challenges effectively. As the market evolves, active management offers the flexibility to capitalize on changing conditions and uncover pockets of opportunity, potentially outperforming despite ongoing uncertainty.

Finsum: Macro uncertainty is giving active managers an upper handed in bond markets, and it could lead to additional alpha.