Markets
Muni clients concerned about rising rates? See how staying the course vs. moving to cash stacks up ... [Read More]
The low yields in the bond market have made it relatively uninteresting to the average investor, but there is a revolution underway. The bond market has been dominated by traditional techniques and old school investors, but many of the quants and hedge funds that overturned the equity market are eyeing the bond market. Systematic corporate bond investing is expanding and firms are taking advantage of trends in government debt or pricing anomalies in bond derivatives. Driving this trend in the bond market is swaths of data that are a part of how trades are now realized. Companies like Blackstone Credit are prepared for the shift into a more systematic trading environment in bonds, and other companies are ramping up their tools to accommodate this shift. FINSUM: Hard to acquire data, and a less liquid market have made bonds less desirable for quants, but the information age is rapidly changing that standard.
The bond market boon has been bad for many fixed income investors, and debt is coming to term in a higher inflationary environment which is eating up all the return. However, bond market investors are turning to factor based investing to earn excess returns. Factor investing is a $700 billion market in equities, and it dwarfs the $25 billion dollar fixed income factor market. Factor investor modifies indices based on factors they think can give an edge over traditional indices. Active bond factor investing can outperform traditional indices in rising yield environments, but factor investing is looking to rival these active funds with systemic decisions. A ‘smart beta’ approach will look to outperform in high yield and emerging market debt.
FINSUM: The extensive literature on systemic fixed income is relatively small, and that's why smart beta strategies have failed to take off in the bond market like they have in equities.
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Small caps have been sluggish since Q2 2022 most indicated by the poorer returns in the Russell 2000 and S&P 600 Small Cap. However, things could turn around for the smaller companies moving forward. A value tilt is pervasive through many small cap companies and as the yield curve begins to steepen that value tilt will edge out over larger growth companies. The other factor favoring small caps is the pending corporate tax minimum. Only 1 of the S&P 600 small caps will see their liabilities rise but lots of S&P 500 companies will face new tax burdens which they previously avoided. This is a historic opportunity for small caps moving into 2022.
FINSUM: With Powell’s renomination it's more likely the yield curve will steepen as future rate hikes will be priced in but no real indication of a move currently; increasing the likelihood of a small cap comeback.
Worried about rising interest rates? These three strategies can help mitigate interest-rate risk. See More