Displaying items by tag: fed

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. 

Despite the pain and volatility of higher interest rates, fixed income issuance is continuing to expand at a healthy clip. Skeptics who are calling for the “death of bonds” are incorrect as the market continues to function well despite the bear market. 

In 2022, global bond issuance was down by 20%. However, this is mostly attributed to above-average issuance during the period of extremely easy monetary policy in 2020 and 2021. 

Now, fixed income sales are normalizing and forecasted to exceed $6 trillion by year-end. And issuance is set to increase even more next year. Over the next couple of years, trillions in corporate debt will need to be refinanced which will be the major driver of new issues. 

On the demand side, interest in the asset class has surged due to yields at attractive levels while the economic outlook remains muddled. Many institutions are forced buyers of fixed income securities due to regulatory reasons. Additionally, proceeds from fixed income investments are also often re-invested. 

Currently, the global bond market is worth $140 trillion which means that even with 2% yields, it would generate nearly $3 trillion in payments. Of course, this figure is much higher given that most yields are much higher, but it’s an indication of the bond market’s staying power. 

Finsum: Fixed income deals with considerable volatility and looks set for its second straight losing year. Yet, the bond market continues to operate fine with minimal systemic risk. 

Despite considerable volatility in 2023, fixed income inflows have been quite robust. According to an annual ETF investor study by Schwab Asset Management, adoption among Millennials is one factor.

According to Schwab, younger investors have a larger portion of their portfolios in fixed income relative to older generations. This is quite contrary to expectations as younger investors typically tend to favor riskier investments. Even Millennials with no fixed income investments, indicated an interest in learning more about the asset class.

According to David Botset, the head of equity product management and innovation at Schwab Asset Management, “Millennials actually indicated that they have a larger percentage of their portfolio in fixed income than older generations, which was quite surprising and not what you would expect.”

The survey was conducted across 2,200 individual investors between the ages of 25 and 75 with a minimum of $25,000 of investable assets. The differences in fixed income allocations between the generations is notable. Millennials had about 45% of their portfolio in fixed income, while baby boomers had 31%, and GEneration X had 37%. 

While about 45% of Gen X investors and 40% of baby boomers plan to invest in a fixed income ETF in 2024, 51% of millennials plan to do so. It’s a validation that the surge of inflows into fixed income ETFs and boom in new issues will only continue. 

Finsum: Charles Schwab conducted a survey of individual investors. One of the most notable findings was that fixed income ETFs are more popular among younger investors than older ones. 

Following the recent selloff in the bond market which has pushed yields on the 10-year Treasury above 5%, Michael Contopolous of Bernstein Advisors compiled some of the best opportunities that he’s noticing in fixed income. 

The first is Treasury Inflation-Protected Securities (TIPS) which are offering a real yield of 2.5%. This is the highest level since 2007 and in the 25th percentile of real yields since TIPS were introduced in 1997. In contrast to most fixed income securities, TIPS would see an increase in returns if inflation expectations were to rise. 

Currently, the spread between the 10Y and 2Y Treasuries is inverted. If the economy experiences an acceleration or a sharp turn lower, it’s likely that the curve will steepen. Thus, fixed income investors can consider a steeper curve. It can have a bullish or bearish tilt depending on an investors’ economic outlook.

Another area of opportunity is preferred securities which are priced much lower than corporate bonds following the regional bank crisis earlier this year. There's a particular opportunity in the preferred share of banks which could rally if the yield curve steepens, or earnings start to grow again. 

Finsum: Fixed income is seeing renewed interest following the recent selloff. Here are 3 opportunities to consider.

According to Travis Spence, the head of ETF distribution at JPMorgan Asset Management, future growth in the ETF industry will be driven by active strategies that will be the main source of innovation in the space. 

Currently, active funds only account for 5% of the total market but account for 25% of inflows. Some of the reasons that investors are favoring active ETFs is greater transparency, liquidity, and pricing. Thus, he believes that more active strategies will be accessible through ETFs in the coming years. And he sees growth in the US and internationally, although adoption has been slower in the latter. 

In fixed income, he believes that active managers have some advantages due to greater inefficiencies in the market and increased difficulty and constraints of tracking a fixed income benchmark. Additionally, many market cap-based indices are overrepresented with indebted companies. 

He added that, “It is easy to see why an active approach to fixed income makes sense. Even passive ETFs are arguably active due to the availability of bonds. Having an active approach in fixed income, where you do not automatically hold the most indebted issuers, fully integrate ESG and actively manage turnover and transaction costs, can offer an attractive solution for investors.”

Finsum: JPMorgan’s head of ETF distribution, Travis Spence, shares why he’s optimistic about active fixed income, and the trends driving its growth.