Displaying items by tag: duration

Over the last decade, private credit has boomed, growing from $435 billion to $1.7 trillion. One consequence of this has been a growing marketplace for private credit secondaries. Currently, the private credit secondary market is estimated to be worth $30 billion, but it’s forecast to exceed $50 billion by 2027.

The secondary market is where private credit investors can sell their stake early. It’s natural that as allocations to private credit have increased, there is now a need for liquidity, which is provided through the secondary market. Most of it is driven by investors looking to rebalance their holdings. Another benefit is that it can potentially provide diversification to private credit investors. Some managers are now fundraising for funds dedicated to the private credit secondary market, such as Apollo Global Management and Pantheon.

There is also an analogue between the private equity secondary market and the private credit secondary market. Although the private equity secondary market is more mature and larger at $100 billion, with many more established funds in the space. According to Craig Bergstrom, managing partner and CIO of Corbin Capital Partners, “I don't think private credit secondaries will ever get to be as big as private equity secondaries. And I don't think they'll even get to be as large as private credit is in proportion to private equity because the duration is shorter.”

Finsum: A consequence of the boom in private credit is a growing and active market for secondaries. It’s evolving similarly to the secondary market in private equity and is forecast to exceed $50 billion by 2027.

Natixis conducted a survey of 500 investment professionals, managing a combined $35 trillion in assets. The survey showed that investors are adjusting their allocations in expectations of more volatility in 2024 due to more challenging macroeconomic conditions. 

A major change in the survey is increasing preference towards active strategies as 58% noted that active outperformed passive for them in 2023, and 63% believe active will outperform this year. Overall, 75% of professionals believe that being active will help in identifying alpha in the new year. 

In terms of fixed income, 62% see outperformance in long-duration bonds, although only 25% have actually increased exposure due to uncertainty about the Fed. In addition to increasing duration, many are interested in increasing quality with 44% looking to increase exposure to investment-grade corporate debt and US Treasuries. 

Money continues to flow to alternatives with 66% believing that there will be significant delta between private and public market returns. Within the asset class, fund selectors are most bullish on private equity and private debt at 55%. 

With regards to model portfolios, 85% of firms now offer them either in-house or through third-party firms. Due to increasing demand, the number of offerings are expected to increase. Benefits include additional diligence and increased odds of client retention during periods of uncertainty. They also help form deeper relationships with more trust between advisors and clients, leading to more of a relationship focused on comprehensive, financial planning. 

Finsum: Natixis conducted a survey of 500 investment professionals and found that model portfolios are increasingly popular. Another major theme is that volatility is expected to remain elevated in 2024 due to uncertainty about the economy and Fed policy. 

The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.

Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD. 

SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds. 

AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential. 

Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs. 

Two ever-present risks for fixed income investors are credit risk and interest rate risk. Rising interest and default rates diminish the value of bonds and have to be considered especially with corporate bonds. 

However, some ETF issuers now offer corporate bond ETFs with less credit and interest rate risk such as the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG). It currently offers a 4.76% yield and invests primarily in short-term, corporate debt with an effective duration of 2.47 years. It’s notable that SFIG can offer such generous yields despite investing in high-quality debt with over 44% of holdings rated AA or A. 

Another potential catalyst for SFIG is when the Fed cut rates later this year. Currently, there are trillions on the sidelines in money market funds and some of this would migrate to funds with higher yields like SFIG.

According to BNP Paribas, another reason to be bullish on investment-grade corporate bonds is due to lower issuance and structurally, higher inflows. It sees less of a case for capital appreciation given the flat yield curve and recent rally, but it believes that yields at these levels are sufficiently attractive.

Finsum: Corporate bond investors have to be mindful of credit and interest rate risk. Investors can mitigate these factors with an ETF that invests in high-quality, short-term corporate debt.

Entering the year, there was considerable optimism that the Fed could begin cutting rates as soon as March. However, the February FOMC meeting, recent inflation data, and the January jobs report have made it clear that the status quo of a data-dependent Fed, prevails. It’s clear that the Fed’s next move is to cut, but timing is the mystery.

This state of affairs means that the window for bond investors, seeking value, remains open. While recent developments have been bearish for bonds, investors have a chance to take advantage of higher yields if they are willing to live through near-term volatility. This is especially if they believe the Fed will cut rates later this year which will lift the whole asset class higher. 

According to Bloomberg, “The US economy is testing bond traders’ faith that the Federal Reserve will deliver a series of interest-rate cuts this year.” Investors can buy the dip with a broad bond fund like the Vanguard Total Bond Market Index Fund ETF, or they can search for more yield by taking on more credit risk with the Vanguard Short-Term Corporate Bond Index Fund ETF. Both have low expense ratios at 0.04% and 0.03%, respectively, and have dividend yields of 3.2%.  

Finsum: Bonds are experiencing a bout of weakness due to uncertainty about the timing and extent of the Fed’s rate cuts. Here’s why investors should consider buying the dip.