Displaying items by tag: bonds

Friday, 17 November 2023 03:42

Bonds Surge Following CPI Report

Equities and bonds moved higher following the October CPI report that came in much softer than expected. As a result, traders increased their bets that the Fed hiking cycle is over, while Fed fund futures showed an increase in the number of rate cuts expected in 2024. Further, odds of a hike at the December meeting went from 21% to 0%, and the market’s consensus for the Fed’s next move is now a 50-basis point cut in July of next year. 

 

In terms of fixed income, the 2Y Treasury note fell by 20 basis points, while yields on the long end saw similar declines. The data is also supportive that the Fed can successfully achieve a ‘soft landing’ as the economy continues to expand, while it’s managed to make significant progress in terms of battling inflationary pressures. Many market participants didn’t think it would be possible for the Fed to successfully curb inflation without throwing the economy into a recession.

 

Some of the key takeaways from the report were core CPI hitting a 2-year low, while headline inflation was flat on a monthly basis and up 3.2% on annual basis. Some of the biggest contributors were weakness in energy prices, shelter costs moderating, and small declines in airfare prices and vehicle costs. 


Finsum: Fixed income and equities soared higher following the October CPI report which came in much softer than expected. 

 

Published in Wealth Management
Wednesday, 15 November 2023 04:13

Duration Positioning with Fixed Income ETFs

Fixed income ETFs are in demand especially with interest rates over 5% and a cloudy economic outlook with risks like a recession and fears of another surge in inflation. Within the fixed income universe, investors can express their views through duration positioning while still taking advantage of income opportunities.

 

Many ETFs allow investors to focus on specific parts of the yield curve. The most well-known examples are several Treasury ETFs which range from ultra short-term to 20+ years. Lately, issuers have launched ETFs for single-year strategies for further optimization. 

 

However, many market participants believe that even more duration-targeting ETFs need to be launched given the disparity of views and volatility that is endemic to a higher rate and inflation environment. While there is an abundance of options in the US, there are less options in the UK and EU.

 

As the fixed income ETF market grows, duration-focused ETFs will continue to be a major area of growth especially as more institutional investors are embracing the asset class and driving demand for these products. Many are also of the opinion that higher rates will lead to an environment of increased volatility, shorter cycles, and faster moves. Additionally, these options will be even more imperative for allocators who are investing in shorter timeframes. 


Finsum: The fixed income ETF market is growing rapidly. Along with inflows and an increase in volatility, several ETFs have been launched that are focused on a specific part of the curve.  

 

Published in Wealth Management

First Trust Advisors is launching its 16th taxable fixed income ETF with the First Trust Core Investment Grade ETF (FTCB). The fund has an expense ratio of 0.55% and will look for the maximum possible long-term return by investing all of its funds in investment-grade securities, comprising Treasuries, TIPS, mortgage-backed securities, asset-backed securities, US corporate debt, non-US fixed income securities, municipal bonds, and CMOs. 

 

The fund’s portfolio managers are Jim Snyder, Jeremiah Charles, Todd Larson, Owen Aronson, Nathan Simons, and Scott Skowronski. Its core philosophy is to analyze fundamentals to identify opportunities and risks while seeking alpha through sector allocation and duration management. Decisions are made through a defined and repeatable process which includes scenario analysis and stress testing. 

 

They see upside for FTCB given that yields and credit spreads are at attractive levels. First Trust also believes FTCB will outperform in an economic downturn due to lower credit risk. It also believes the fund is well suited for the current market environment where risk management has been crucial, and active strategies have outperformed. According to First Trust ETF strategist Ryan Issakainen, the fund should “produce better risk-adjusted returns than passive benchmarks.”


Finsum: First Trust is launching a new active fixed income ETF, the First Trust Core Investment Grade ETF which looks to outperform passive benchmarks, maximize long-term returns, and minimize credit risk. 

 

Published in Wealth Management

With yields on the 10-year Treasury briefly above 5%, many investors are considering whether this is the time to lock in long-term Treasury ETF exposure. Entering 2023, this was the consensus trade as many expected a slowing economy would erode inflationary pressures and compel the Fed to start cutting rates. Instead, long-duration Treasuries have seen another year of losses as the economy and inflation remained more durable than expected, and the Fed has continued to hike rates.

 

YTD, the iShares Treasury Bond 20+ Yr ETF (TLT) is down 13%, while the short-duration focused iShares Treasury Bond 0-1 Yr ETF (SGOV) is slightly up on the year. However, the case for long-duration Treasuries is even stronger than at the start of the year, and investors should consider taking advantage of the weakness. 

 

The Federal Reserve has been increasingly dovish in the face of soft economic data and has already signaled that it will hold off on hikes at its next meeting. There is no longer inversion between the 2Y and 10Y which has generally been a reliable indicator of a recession. Weakness in regional banks and a spike in auto loan delinquencies also are indicative of the economy weakening which would also lead to more dovish policy from the Fed and relief for long-duration Treasury ETFs.


Finsum: Fixed income inflows have been strong all year despite considerable volatility and uncertainty about the economy and Fed.Long-duration Treasuries have floundered so far this year, but here are some reasons why investors should consider buying the dip.

 

Published in Wealth Management
Friday, 03 November 2023 14:39

Don’t Be Distracted by Short-Term Volatility

The Federal Reserve is clearly close to the end of its hiking cycle. Thus, there is more data dependency which is leading to big swings in the stock and bond markets following the release of economic data such as the CPI and the jobs report. According to Blackrock’s Rick Rieder, the CIO of Global Fixed Income, many market participants are making a mistake by over reacting and losing sight of the more durable and investable trends. 

 

There have been several instances of misleading data. For instance, the ISM hit a contractionary level of 48 in January of this year which led many to believe that a recession was imminent. This has proven to be incorrect as the economy is forecasted to expand by 2% on a real basis this year. Weakness in manufacturing has been more than offset by strong household balance sheets, wage growth, and growth in services.

 

Reider also believes that investors should temper their urge to make bold predictions for 2024 or the long-term given the number of unpredictable forces of a historical nature, impacting the global economy. There is a wide range of possible outcomes and major potential ramifications in terms of geopolitics and financial markets, so it’s important to not fall prey to short-term volatility.


Finsum: Blackrock’s Rick Reider shared why investors shouldn’t overreact to economic data even though this is the temptation with the Fed close to the end of its hiking cycle. 

 

Published in Wealth Management
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