Markets

With yields rising as the Fed pursues its hawkish monetary policy, investors are piling billions into ETFs that track both the short- and long-term treasury market. For example, $13 billion has been added to the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) this year, a product that now offers some of the most attractive yields in over a decade, while having very little interest-rate risk. On the other end of the yield curve, investors have flooded a similar amount into the iShares 20+ Year Treasury Bond ETF (TLT), which has experienced historic losses due to the Fed’s rate hikes. TLT has seen more new inflows than any other fixed-income ETF this year. However, the reasons for these inflows likely differ between the two. Investors seeking yield can now find that in a short-term treasury ETF like BIL, while investors that believe the Fed will slow down rate hikes, or even cut rates in the future, will benefit from the high duration that a long-term bond ETF such as TLT could provide. The steep losses in the market this year have also driven defensive investors into cash-like instruments such as BIL.


Finsum:Investors looking for yield and safety are piling into short treasury ETFs, while investors seeking high duration are flooding into long-term bond ETFs.

Small-cap stocks appear to be having their moment this year outperforming their large-cap peers. The S&P 600 small-cap index is currently on pace to outperform the S&P 500 for the first time since 2016. One reason for their outperformance is a strong U.S. dollar. This is due to the negative effect that a strong dollar has on the profits of multinational companies. A strong dollar harms U.S. companies that sell goods overseas by making them less affordable. Smaller companies, on the other hand, are more insulated from adverse currency effects as most of their business is done stateside. For instance, companies in the S&P 600 index generate only 20% of their revenue outside the U.S, while companies in the S&P 500 generate 40% of their sales abroad. This had led to some of the largest companies in the U.S warning of currency risks in their latest earnings calls. In addition to a strong dollar, small caps are also benefitting from better valuations. According to FactSet, the S&P 600 is trading at 10.8 times expected earnings over the next 12 months, which is well below the S&P 500’s forward price/earnings ratio of 15.3.


Finsum: Small-cap stocks are outperforming large-cap stocks this year due to a strong U.S. dollar and more attractive valuations.

A, um, fixation, among investors this year: the performance of fixed income assets, according to Wells Fargo.

Wells Fargo published several reports on issues playing a role in the challenging environment today. The intent of the executive summary was to address heard often voiced by investors. Some of the top questions revolving around fixed income included:

  1. What is happening to bonds so far in 2022?
  2. Why continue to invest in bonds?
  3. Why is the Fed garnering so much attention this year?
  4. What should investors expect from the remaining three Fed meetings of this year?
  5. What does Fed quantitative tightening mean?
  6. What do you mean when you say, “financial conditions in the economy are tightening”?
  7. Should we be worried about liquidity in bond markets?

Equity and fixed income markets simultaneously endured negative returns in the first of the year – catching a number of investors off guard. While all major fixed indexes bounced back in July in light of receding yields, year to date, they remain negative.

Inflation? Yep; it’s stuck in gear; that is, elevated. Meantime, the broader economic environment – especially the labor market, has proved to be one tough cookie, according to gsam.com.

”Higher inflation and higher growth volatility are propelling us into a higher yield environment, marking a departure from the post-financial crisis era,” according to Whitney Watson, global head of Fixed Income Portfolio Management, Construction & Risk. “Ultimately, we think this presents opportunities in high-quality fixed income assets, such as investment grade corporate bonds and agency MBS.”

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