Displaying items by tag: volatility

For bond traders, 2023 has been one of the most volatile years in recent decades. It’s not entirely surprising given the various forces impacting the market such as inflation, a hawkish Fed, a slowing economy, and significant strains to the banking system.

In a Bloomberg article, Michael Mackenzie and Liz McMormick discussed reasons why these conditions will persist for the remainder of the year. In response, investors are looking to remain nimble and flexible especially given wide swings and a risky environment. 

Bond traders are expecting this uncertainty to continue as long as the Fed continues its hiking cycle and gets clear when it will start cutting rates. A major factor in Treasury inflows has been the slowing economy as recession fears increase, however the labor market continues to add jobs, and the economy continues to expand. Additionally, the recent spate of bank failures and financial stress also was supportive of Treasury inflows. 

Maybe the best illustration of the volatility is the 2-Year Treasury yield which got as high as 5.1%, following Fed Chair Powell’s hawkish comments. And. it got as low as 3.6% a few days later amid the failure of Silicon Valley Bank.

Finsum: The bond market has experienced incredible volatility in Q1. However, odds are that this volatility will continue all year. 


Published in Eq: Total Market
Wednesday, 05 April 2023 15:38

Fixed income on line two

Seems that fixed income’s calling and it might pay to presume it’s not someone hawking insurance.


In 2023, it “has a huge potential” to dispense strong returns, according to Joanna Gallegos, co founder of BondBloxx Investment Management, reported yahoo.com, which carried an article earlier in the year which originally was published on ETFTrends.com. That said, it remains a good idea to be cautious.

Worth investing time in, especially: high yield corporate debt. That’s because they offer high yields and it’s projected by Bond Boxx that corporate defaults, compared to their long term average, will remain lower.

Tormented by hyper interest rate spikes that culminated in spiraling bonds yields, 2022 was one of the worse for fixed income, added money.usnews.com.

It sparked a deep dive of price of fixed income assets, and longer duration issues in particular.  

This year? Oh how the page turns. Paul Malloy, head of municipals at Vanguard, said "the 2023 outlook is drastically different than the position we found ourselves in last year,” Indeed, fixed-income investors started 2022 with a near-zero federal funds rate, but are now entering 2023 with a rate of 4%-plus. According to Malloy, the Federal Reserve "front-loaded" much of its policy tightening this cycle and is likely nearing a wrap.


“The fixed income asset class has a huge potential to deliver better performance in 2023,” Gallegos said on CNBC’s “Worldwide Exchange.” “We’re at new rate levels we haven’t seen in over a decade plus, and so, you’re really resetting valuations in a way that are very attractive.”


Published in Eq: Asia

Short-term dated options are continuing to grow in popularity which many analysts are warning could have unintended consequences for market stability according to a Reuters article by Saqib Iqbal Ahmed.

The fastest growing segment is zero days to expiry (ODTE) options, where traders are looking to profit from small, intraday market moves. Most options are based on indices, popular ETFs, or single stocks. As of March 2022, the daily notional value of all ODTE trades had exceeded $1 trillion.

The contracts are popular among buyers, because small moves in the underlying instrument can result in huge moves for its derivatives. For sellers, the appeal is that the options decay in value and the trade can be closed at the end of the day. 

However, many warn that large positions in these options could set off a ‘squeeze’ in the event of an unexpected, intraday move. This would cause option sellers to take large losses and potentially force hedging which could exacerbate the move in the underlying instruments. According to JPMorgan, it would be a similar dynamic to the ‘Volmageddon’ crash of 2018 when many inverse volatility products crashed due to a large spike in the VIX.

Finsum: A new threat to market stability is the rise of ODTE options which are becoming very popular with retail and institutional traders. However, they do have the potential to exacerbate large, intraday market moves. 


Published in Eq: Total Market

There is no question that investing in low-cost mutual funds or exchange-traded funds that mirror a benchmark index is a popular strategy to potentially reduce the impact of fees on a portfolio. In fact, many of these passive index strategies have often outperformed more costly actively managed funds. However, while tax efficient, they are unable to fully take advantage of short-term market volatility, according to Neale Ellis and Matthew Michaels of Fidelis Capital. On the other hand, direct indexing has become an attractive alternative to a portfolio of low-cost funds and ETFs, and unlike owning a mutual fund or ETF, an investor directly owns a basket of individual stocks that tracks a designated benchmark index. The strategy also allows greater flexibility during periods of volatility to selectively harvest losses while still closely tracking the benchmark. This is due to the fact that individual equities tend to see much higher volatility than a diversified mutual fund or ETF. This increases the opportunity for tax loss harvesting. Realizing losses in a portfolio can offset capital gains, which creates tax savings. Failing to harvest those losses during periods of short-term volatility could lead to lower results, essentially leaving money on the table.

Finsum:While passive index ETFs are tax efficient, they are unable to fully take advantage of short-term market volatility, which is something that direct indexing can do.

Published in Wealth Management

According to a report released this month by the Investment Company Institute, only 2.5% of defined contribution plan participants stopped contributing to their plans last year. This suggests that despite market volatility, Americans are still exhibiting disciplined savings habits. The report, titled “Defined Contribution Plan Participants’ Activities, 2022,” examined participant-directed changes in DC plans by tracking activity through recordkeeper surveys and comparing it to data going back to 2008. Based on the results, DC plan participants remained committed to making contributions like they had in previous years. For instance, only 2.2% of participants stopped contributing in 2021, 2.3% in 2020, 2.3% in 2019, and 3.4% in 2009. In fact, the withdrawal activity of defined contribution plan participants was 4.1% in 2022, the same as in 2021. In prior years, the percentage of plan participants who took withdrawals was 3.8% in 2020, 3.9% in 2019, and 3.1% in 2009. While levels of hardship withdrawal activity increased slightly last year, they were still low in absolute terms. This indicated that despite a challenging market environment, Americans are set on protecting their retirement savings, which was the conclusion of the ICI report.

Finsum:According to the results of a recent ICI report, only 2.5% of defined contribution plan participants stopped contributing to their plans last year despite a challenging market environment.

Published in Wealth Management
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