Displaying items by tag: fixed income

In a recent Bloomberg article, Katherine Greenfield covered strength in high-yield fixed income ETFs on the back of the equity rally and growing optimism that the US will evade a recession, while inflation gradually decelerates. Initially, strength in equities was confined to the tech sector but has now broadened out to the rest of the market.

Another indication that the odds of a soft landing continue to move higher is that there was more than $2 billion of inflows, last week, into the iShares iBoxx High Yield Corporate Bond ETF which has $17 billion in assets. This was the largest inflow into any fixed income ETF over that period and the most since November 2020.

Strength in high-yield fixed income is counterintuitive due to several downgrades and stresses in areas like regional banks and commercial real estate. However, investors seem to be looking past these issues and focusing on improvements on the economic and inflation front. 

Overall, high-yield fixed income is up about 4% YTD, following a 11% drop in 2022. Investors also seem eager to lock in high rates as futures markets indicate that the Fed is going to pause it's hiking campaign, while many expect it to start cutting rates by the end of the year.

Finsum: High-yield fixed income ETFs are seeing major inflows despite an assortment of risks. Many investors believe these risks are priced in, while recent news on the economy and inflation have been bullish for the asset class.

Elana Margulies-Snyderman of EisnerAmper conducted an interview with Liridon Gila, the Co-CIO of Sawgrass Asset Management, to get his thoughts on active equity and fixed income. 

Gila starts with a broad view by trying to identify where we are in the economic cycle, and how monetary and fiscal policy will move in reaction which causes its own ripple effects for markets and the economy.

Currently, he sees a challenging environment for risk assets as the odds of a recession continue to rise. Despite this, the Federal Reserve is maintaining its hawkish posture and pulling liquidity from the market. Fiscal policy has been a major driver of the economy over the last couple of years, but this is unlikely to continue to be a tailwind given a divided Congress.

While he is wary of equities, he is more optimistic about fixed income. This is primarily because he expects that inflation has already peaked which would be a healthy tailwind for bonds. Additionally, he sees a normalization of inflation and rates over the next couple of years which means that current yields are quite attractive and unlikely to remain at these lofty levels. 

Finsum: Active fixed income is a great strategy for the current market given rising odds of a recession, peaking inflation, and very attractive yields.

Municipal bonds are not exactly the most exciting part of the market. Most investors usually only think of them when there is a crisis or high-profile downgrade.

Yet, in today’s environment it makes sense why there is renewed interest in the category. They are one way that investors can take advantage of higher rates, but they also provide a greater degree of safety given that default risk is much lower.

Todd Rosenblum discusses why the successful resolution of the debt ceiling could be a catalyst for further gains in a blog post for ETFTrends. Prior to the resolution, there was a surge of demand for Treasuries as investors were looking to de-risk their portfolios. 

Now, there is outflow from Treasuries and expectations of more weakness given strength in equity markets and increased supply coming online over the next few months. Thus, there is a rotation into other types of fixed income products. 

Municipal bonds are one recipient of these outflows especially as they offer tax benefits. Investors also can buy a municipal bond ETF which is a diversified, low-cost way to get exposure to the asset class. 

Finsum: Municipal bonds are one way that investors can take advantage of high yields, while also offering tax benefits. They are seeing renewed interest following the debt ceiling resolution.

Someone say ‘yeesh?’

Well, it wouldn’t exactly come out of left field considering how difficult it is to conceive of more challenging circumstances for fixed income investors, according to lazardassetmanagement.com.

After all, bear in mind the cocktail of incoming fire it’s facing: burgeoning inflation, spikes in the rates, shutdowns. On and on it goes, sparking volatility and forcing returns for broad fixed income market indices into negativity,  

Sure, with volatility comes risk. But it also can kindle opportunity. So, instead of ducking it, it could be that by facing it, eye to eye, investors in fixed income will reap the benefits.

Meantime, among the ultra rich, it’s not just about feasting on caviar and chugging the finest wines. They’re also fretting about a possible recession, according to barrons.com.

So, what are their advisors doing in turn? According to a survey of family offices conducted by UBS, they’re moving toward more defensive holdings, like high quality, short duration fixed income. A total of 239 family offices were surveyed by the wealth manager. The family offices had a net worth of $2.2 billion.

Financial markets are breathing a sigh of relief following an agreement between Democrats and Republicans to raise the debt ceiling and avoid a default. Not surprisingly, equity markets are reaching their highest level since last summer, and stocks are now up more than 20% from last October’s lows.

However, one consequence is that a major wave of Treasuries is expected to hit the market in the coming weeks as the US Treasury looks to replenish its holdings since the Treasury reached its limit on borrowing in January. 

According to Wall Street, there is expected to be issuance of $400 billion in June and $500 billion between July and September with a cumulative total of $1.3 trillion by the end of the year. Some are warning that this could lead yields to modestly push higher and reduce overall market liquidity for equities and fixed income.

Others are more sanguine and believe that this new supply will be absorbed by money market funds who are looking to move money out of repo facilities and into longer duration Treasuries. 

Another variable that could impact Treasury demand is whether the Fed will continue hiking rates or has the hiking cycle truly ended. The latter scenario would be more beneficial for fixed income, while the former would crimp demand. 

Finsum: Financial markets are recovering strongly from the debt ceiling agreement, but an onslaught of Treasury supply could have a major impact on fixed income markets.