Displaying items by tag: duration

Even though inflation continues to force the Fed’s hand on tightening, money managers are starting to rebuild their exposures toward Treasuries, with the hope that the highest payouts in years will help cushion portfolios from the damage inflicted by additional rate hikes. For instance, Morgan Stanley believes that a multi-asset income fund can find some of the best opportunities in decades in dollar-denominated securities such as inflation-linked debt and high-grade corporate obligations. That’s because interest payments on 10-year Treasuries have hit 4.125%, the highest since the financial crisis. In addition, PIMCO estimates that long-dated securities, which have been hit hard due to the Fed’s hawkishness, will bounce back if a recession should occur. They believe that a recession would ignite the bond-safety trade, where government debt would act as a hedge in the much-maligned 60/40 portfolio. Essentially, higher income and lower duration are helping to make the case that bonds will have a much better 2022. While inflation and liquidity concerns remain, the median in a recent Bloomberg survey shows “dealers, strategists and economists project bond prices will rise modestly in tandem with cooling inflation, with the 10-year US note trading at 3.5% by end of next year.”

Finsum:A combination of higher income payments and lower duration has money managers becoming more bullish on treasuries.

BondBloxx Investment Management recently announced the launch of eight duration-specific U.S. Treasury ETFs. The funds, which trade on the NYSE Arca, offer investors a more precise, lower-cost way to get exposure to U.S. Treasury Securities. The ETFs track a series of indices developed by Bloomberg Index Services that include duration-constrained subsets of U.S. Treasury bonds with over $300 billion outstanding. The funds add to BondBloxx’s existing eleven products launched this year, including seven industry sector-specific high yield bond ETFs, three ratings-specific high yield bond ETFs, and one short-duration emerging market bond ETF. The new ETFs include the BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF), the BondBloxx Bloomberg One Year Target Duration US Treasury ETF (XONE), the BondBloxx Bloomberg Two Year Target Duration US Treasury ETF (XTWO), the BondBloxx Bloomberg Three Year Target Duration US Treasury ETF (XTRE), the BondBloxx Bloomberg Five Year Target Duration US Treasury ETF (XFIV), the BondBloxx Bloomberg Seven Year Target Duration US Treasury ETF (XSVN), the BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF (XTEN), and the BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF (XTWY).

Finsum:BondBloxx adds to its existing suite of ETFs with eight duration-specific U.S. Treasury ETFs giving investors lower cost exposure to U.S. Treasury Securities.

When an investor owns a target date fund, the asset mix shifts over time. For younger investors, the portfolio emphasizes equities and allocates less to long-duration fixed income. When investors get older and approach retirement, target-date funds reduce the equity exposure and add duration to fixed income. Tyler Thorn, a multi-sector portfolio manager at PGIM Fixed Income, told Pension & Investments that this is the opposite of how duration should be managed. He believes that a target-date fund’s duration goes in the wrong direction. He stated, “Instead of starting low and rising with age, it should start high and decline with age.” Thorn believes that younger investors need more duration exposure since they will be spending a lot more in the future. Thorn also believes that if these changes were implemented, they could make the 60/40 portfolio more viable.

Finsum:A PGIM Fixed Income manager believes that the 60/40 portfolio can be fixed if bond duration was managed differently.

(New York)

Right now might not seem like the most important time to buy rate-hedged or short duration funds. The Fed is supposed to be on “pause” after all. However, in our view, now might be a critical time to have some rate hedged assets in the portfolio. The reason why is that yields have pulled back strongly from just a couple of months ago, including yesterday, but given the fact that it is almost purely the Fed which has caused the sharp reversal, rates could swing just as wildly higher if their comments, or economic data, changes. In other words, the bond market looks overbought right now because of Fed comments, but it could easily snap back to where it was in December in violent fashion.

FINSUM: We think this is a time for caution on rates and yields given how strongly the market has reversed over the last couple of months.

(New York)

With all the newfound reticence of the Fed, one important fact remains—they could hike at any time. The Fed was hawkish for a long time, and as dovish as they have suddenly become, a position shift on rates could be quick. Accordingly, when considering income-focused investments, advisors need to be very mindful about rate risk. One way to earn good income while also hedging against rates is to look at short term bond funds. Zero and short duration bond funds have little to no rate/duration risk, which means they can earn income without the threat of big losses coming from movements in rates and yields. Some funds to consider are the ProShares Interest rate hedge family or the Fidelity Limited Term Bond (FJRLX), the latter of which yields 2.89% and has a duration of 2.4 years.

FINSUM: Short-term yields have come up so much that limited term bond funds now look like a great buy for stable income without so much capital risk.