Displaying items by tag: fixed income

Investors have been flocking to strange corners of the fixed income market as pressures are rising from both the Fed and inflation. The latest place investors are finding relief is floating rate investment-grade corporate debt. Corporations were reluctant to create in the early stages of the pandemic to supply floating rate debt with yields near zero on government debt. However, there is a huge demand for floating-rate debt today, and large investment banks like JPMorgan, Morgan Stanley and Citigroup Inc. are all jumping into the investment-grade bond market. Floating rate risk allows investors to mitigate duration risk which with rate hikes pending is a potential threat.

Finsum: This could be just the start of the trend or there could be a lot more to come, but look for the less used avenues of the debt market to start to spark with fixed income in the place it's in.

Many investors are fretting over the rising bond yields which are sending their prices tumbling, but this could just be the tip of the iceberg. The aggregate bond index AGG has already fallen 3.9% and that's with the critical 10-year T-bill only rising to a 2% yield. If the 10-year hikes all the way up to its high of 3.25% in 2018 that could be a disaster. With inflation at a 40-year high that's a real possibility and any yield you are getting is all eaten away at. However, if inflation is temporary (caused by supply chains) or Fed pulls breaks fast enough then yields might be maxing out, and bond prices could turn around.

Finsum: Inflation expectations are remarkably low which means that investors are convinced either the Fed will credibly bring inflation down or as supply chains loosen that will bring inflation down. Markets are saying that bond risk is priced in.

The fixed income ETF market took a hit in 2020, and it's been a very slow recovery. Still, active funds outperformed during this time period, and that trend could continue into 2022. A stand-out active bond ETF to consider is Fidelity Total Bond ETF. it’s seen stellar performance when compared to its peers and its managers are committed to ensuring liquidity. Another ETF to watch out for is Pimco enhanced Short Maturity Active ETF. This fund is more centered around stability and security with less risky management. However, avoiding high yield corporate debt and currency risk these factors can make it a safer alternative in the upcoming cycles.

FINSUM: Shorter duration active bond ETFs are really important to consider right now because they mitigate the single biggest risk that exists in bond markets: rising rates.

Macro factors are flummoxing the bond market and a combination of rising inflation and higher interest rate forecasts are crushing bottom lines. However, now is a great time to consider the future tax bill. Rarely can investors see the future, but the Fed is being about as explicit as possible about hiking rates multiple times this year. This means as yields creep up, bond prices will fall in various segments of the bond market. This is an opportune time to consider cutting ties with bonds and realizing the losses you have because it will be over a month before investors will want to jump back in and they can harvest the losses for the end of the year. FINSUM: Most investors have been looking to active funds and shorter duration to minimize inflation risk, but tax-loss harvesting is a nice way to take advantage of rising yields.

New survey data is out regarding how investors are utilizing fixed income ETFs and how they are represented in a portfolio. In 2021 Fixed income represented about 18% of global ETF assets under management, and many investors plan on increasing their use going forward. The number one purpose for fixed income ETFs was for liquidity management as 83% of surveyors use them in this way. However, transition management, derivative complementarity, and tactical adjustments were also highly cited reasons for their use. Many draw on fixed income ETFs for liquidity purposes, and this is particularly evident in the bid-ask spreads. Relative to their underlying securities ETF spreads for HYG were 48x smiler than the underlying assets.

FINSUM: It's clear investors aren’t terribly worried about lower yields and rising interest rates, these ETFs are giving freedom and flexibility in investors’ portfolios.