Displaying items by tag: 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. 

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.

Franklin Templeton is optimistic about fixed income in the coming year due to the Federal Reserve ending its hiking cycle, and inflation continuing to trend lower. However, it believes that rates will remain at these levels for much of 2024 in order for inflation to fall to the Fed’s desired level, leading to a more challenging environment in the first-half of the year. 

Amid this backdrop, the firm is bullish on municipal bonds especially with so many investors on the sidelines, overweight cash, or in short-term credit. Municipal bonds offer historically attractive yields, favorable tax treatment, and a longer-duration which should outperform in an environment with falling rates and a flattening yield curve. 

The firm notes that local governments remain in strong shape from a fiscal perspective even despite a slowdown in economic activity and rising costs. Many still have excess funds leftover from federal aid during the pandemic and have been relatively disciplined in terms of spending. Further, muni bonds have lower default rates than corporate credit while also having higher after-tax returns. Franklin Templeton believes many investors will reallocate from money markets into municipal bonds in order to lock in yields at these levels especially as monetary policy eases. 

Finsum: Franklin Templeton is bullish on fixed income in the coming year. It also highlights a bullish case for municipal bonds due to the sector’s strong fundamentals and favorable positioning in this macro environment. 

Entering 2024, active fixed income investors are grappling with a unique mix of risks and opportunities given recent developments in inflation, yields, and rates. Insight Investment collected thoughts from BNY Mellon’s fixed income portfolio managers to get their thoughts on the coming year. 

Adam Whiteley, the portfolio manager of the BNY Mellon Global Credit Fund, sees a continuation of 2023 trends in credit markets in 2024. He believes developed economies will avoid a recession. However, the major focus is on determining where markets are in the credit cycle. This will have implications for identifying risks and the best sectors within the fixed income universe.

The portfolio managers of the BNY Mellon Global Short-Dated High Yield Bond Fund have a positive bias for high-yield and short-duration debt. Yet, they believe that investors will have to take credit analysis and cash flow modeling more seriously, given they expect a slight increase in the default rate. Overall, they still see the high-yield debt market as being stable and strong despite these risks due to better credit quality and strong balance sheets.

In terms of emerging market (EM) debt, the firm has a cautious outlook in the near-term despite more upside for EMs. The biggest variable is likely to be developed market and economic performance. EM corporates tend to have strong balance sheets so are well positioned for any slowdown. 

Finsum: BNY’s active fixed income managers shared their thoughts and outlook for 2024. Overall, they see some risks in the coming year, but the overall market remains in a good place. 

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.