Displaying items by tag: fed

The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.

Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD. 

SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds. 

AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential. 

Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs. 

Many asset managers are increasingly confident that private real estate is at or very close to the bottom of its cycle and presenting an opportunity for outsized returns. It’s a major shift from last year when many funds had to put limits on redemptions. This year, institutional investors are increasing allocations in anticipation of an improving macro environment.

Additionally, many believe that concerns about commercial real estate are exaggerated. Other than the office sector, most segments have strong fundamentals. Recently, deal volume has improved as sellers have come down on price. Overall, it’s estimated that prices are down on average by 18.5% from the peak.

Over the last decade, private real estate in the US generated annual returns of 6.4%. According to James Corl, the head of private real estate at Cohen & Steers, returns will average between 10% and 12% in 2024 and 2025. He added that returns in private real estate are highest a year after the Fed stops tightening. 

Many investors are anticipating attractive deals in the coming months as there could be several forced sellers with many borrowers needing to refinance at higher rates. Over the next 2 years, $1.2 trillion of commercial real estate loans will mature. At the end of the year, it was estimated that about $85.5 billion of this debt was distressed. 

Finsum: Asset managers are increasingly bullish on private real estate. History shows that the asset class generates outsized returns in the periods that follow the end of a Fed tightening cycle. 

Recent economic data and tea leaves from Fed officials have resulted in more challenging conditions for fixed income. Essentially, there is much less certainty about the timing and direction of the Fed’s next move as economic data and inflation have been more robust than expected. 

According to Michael Arone, chief investment strategist at State Street, this presents an opportunity with high-yield bonds given that yields are at attractive levels while a strong economy indicates that defaults will remain low. So far this year, high-yield bonds have outperformed with a slight positive return, while the iShares Core US Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND) are down YTD.

This is a contrarian trade as high-yield bond ETFs have had $387 million of outflows YTD, while fixed income ETFs have had $2.8 billion of net inflows YTD. It’s also a way for fixed income investors to bet that the US economy continues to defy skeptics and avoid a recession despite the Fed’s aggressive rate hikes. 

Currently, high-yield bonds have an average spread of 338 basis points vs Treasuries. Many of the most popular high-yield ETFs have effective durations between 3 and 4 years which means there is less rate risk. Spreads have remained relatively tight and could widen in the event of the economy slowing. 

Finsum: High-yield ETFs are offering an interesting opportunity given attractive yields. This segment of the fixed income market also is benefiting from recently strong economic data which indicates that default rates will remain low.

The rally in bonds since Fed Chair Powell’s pivot at the December FOMC meeting has been fully wiped out following recent economic data and a more hawkish than expected FOMC at the February meeting. 

Over the last month, forecasts for the timing and number of rate cuts in 2024 have been severely curtailed. Entering the year, many were looking for 6 rate cuts with the first one in spring. Now, the consensus forecast is for 3 cuts, starting in July. This is consistent with FOMC members’ dot plot at its last meeting.

The narrative is clearly changing with some chatter that the Fed may not cut at all. Prashant Newnaha, senior rates strategist at TD Securities Inc., noted that “January CPI is a game changer — the narrative that Fed disinflation provided scope for insurance cuts is clearly now on the chopping board. There is now a real risk that price pressures will begin to shift higher. The Fed can’t cut into this. This should provide momentum for further bond declines.”

Given these developments, Amy Xie Patrick, the head of income strategies at Pendal Group, favors corporate credit over Treasuries. She views the strong US economy as providing a tailwind to risky assets, while making Treasuries less attractive. 

Finsum: Bonds have erased their rally following the December FOMC meeting when Chair Powell signaled that rate cuts win 2024. Here are some of the drivers and thoughts from strategists. 

Bonds and stocks weakened following a stronger than expected January CPI report which led traders to reduce bets on the number of rate cuts in 2024. The 10Y Treasury yield climbed 15 basis points, while the 2Y yield was up 19 basis points. 

On a monthly basis, prices were up 0.3% vs expectations of 0.2%. Annually, there was an uptick at 3.1% vs expectations of 2.9%. Food and shelter prices were major contributors with gains of 0.4% and 0.6%, respectively. Along with the recent jobs report, the data undermined the notion that the Fed would be turning dovish later this year. The anticipation of a Fed pivot has been a major catalyst, fueling strength in equities and fixed income over the last couple of months. 

Instead, the status quo of ‘higher for longer’ remains. Some investors are now anticipating that the 10Y yield will rise further. According to Skyler Weinand, chief investment officer at Regan Capital, “Bond yields have not peaked, and we believe that a 10-year Treasury yield with a 5-handle is more likely than a 3-handle in 2024. Persistent inflation, full employment and strong growth may delay the Fed’s rate cuts.”

Finsum: Stocks and bonds declined as the January CPI came in hotter than expected. Fed futures showed traders reduced estimates for the number of rate cuts in 2024.