Last year was a dismal year for fixed-income funds as bonds had their worst year on record. But this year, bonds are regaining steam partly due to an inverted yield curve. Fixed-income ETFs saw roughly $26 billion in inflows last month. Todd Rosenbluth, head of research at VettaFi, told Mike Santoli on CNBC’s “ETF Edge” that “There’s now income within the fixed income ETFs that are available. We’ve seen higher-quality investment-grade corporate bond ETFs. We’ve seen high-yield fixed-income ETFs see inflows this year, as well as some of the safer products.” For example, the 10-year Treasury yield was trading at 3.759%, while the yield on the 2-year Treasury rose to 4.644% on Wednesday. In addition, the yield on the 6-month Treasury hit 5.022%, its highest level since July 2007. With yields at their highest in decades and lofty stock valuations, investors are looking for areas of strength in the market. In the same ETF Edge segment, James McNerny, portfolio manager at J.P. Morgan Asset Management, added “When we break down the flows that we’re seeing, we’re seeing flows into higher-quality, longer-duration products, and credit products on the front end of the curve. Those have been the lion’s share of the majority of the flows that we’ve seen.” Jerome Schneider, managing director at Pimco, told CNBC “That fixed income funds are gaining popularity because they offer investors attractive yields in an uncertain economic environment.”
Finsum:With yields at their highest in decades, bond ETFs are seeing strong inflows as investors seek income in an uncertain economic environment.
If you’re looking to hedge your client’s portfolio from inflation, consider investment-grade ETFs. That is according to American Century Investments client portfolio manager Balaji Venkataraman. He spoke at the recent ETF Exchange conference in Miami Beach and noted how the Fed’s moves played a role in the dismal performance of bonds last year. However, he also added that investors may see increased value in fixed-income vehicles this year. He stated, “The rate risk has subsided meaningfully because the fixed income market tends to price in where the Fed is going well before the Fed gets there. And that’s why we’ve seen a decline in yields here today.” Venkataraman also noted that investment-grade bonds, which are a debt of higher-grade securities, could be critical investments during periods of heightened inflation, as yields begin to fall in response to the Fed easing rates. He stated, “The beauty of fixed income in this environment, if the Fed eventually does [come to] its peak in terms of the terminal rate, bond yields should probably continue to come down.” While bonds saw their worst year on record last year, fixed-income ETFs continued to see inflows. That trend continued into this year, as bond funds saw $20.8 billion in inflows in January, the most of any asset class last month, according to ETF.com data.
Finsum:According to American Century Investments client portfolio manager Balaji Venkataraman, investors should consider investment grade bond ETFs during periods of heightened inflation, as yields begin to fall in response to the Fed easing rates.
Morgan Stanley recently announced the launch of an exchange-traded fund platform with the listing of six Calvert ETFs on NYSE Arca, including an actively managed fixed-income ETF. The Calvert Ultra-Short Investment Grade ETF (CVSB) will focus on investment-grade debt issuers. Managers Eric Jesionowski and Brian S. Ellis seek to maximize income, to the extent consistent with the preservation of capital, through investment in short-term bonds and income-producing securities. Investors will gain diversified short-term fixed-income exposure to an actively managed portfolio of high-quality bonds of issuers that Calvert believes are demonstrating effective management of key ESG risks and opportunities. The other five ETFs include four indexed ESG equity strategies and an active ESG strategy. The funds include the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (CDEI), the Calvert US Large-Cap Core Responsible Index ETF (CVLC), the Calvert International Responsible Index ETF (CVIE), the Calvert US-Mid Cap Core Responsible Index ETF (CVMC), and the Calvert US Select Equity ETF (CVSE). As part of the announcement, Dan Simkowitz, head of Morgan Stanley Investment Management, said the following in a statement. “This launch is the first step in MSIM’s development of a robust ETF platform that supports products across our businesses, asset classes, jurisdictions, and brands.”
Finsum:Morgan Stanley announced the launch of an ETF platform and the listing of six Calvert ETFs, including an actively managed ultra-short investment grade ETF.
Last month, fixed-income ETFs saw more inflows than equity ETFs. Elisabeth Kashner, director of global fund analytics at FactSet said in a phone interview with MarketWatch that “You don’t see that every day. That’s kind of a big deal.” According to Kashner, fixed-income ETFs brought in around $23.7 billion in January, while equity ETFs raked in a total of $22.9 billion. In 2022, rates rose quickly amid sky-high inflation. Due to this, investors embraced more “targeted products” than broad fixed-income funds, according to Kashner. This continued into January as the Schwab Short-Term U.S. Treasury ETF (SCHO) and the iShares 20+ Year Treasury Bond ETF (TLT0) were among the top 10 funds for inflows. Kashner noted that the Schwab Short-Term U.S. Treasury ETF “is what you buy defensively if you want to be in high-quality” fixed income “but you don’t want too much duration exposure,” due to concern about rising rates. She also said that the “iShares 20+ Year Treasury Bond ETF, which provides duration exposure, tends to attract investors worried about a recession.” Other fixed-income ETFs that saw strong inflows last month include the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), according to FactSet data.
Finsum:Fixed-income ETF inflows outpaced equity ETF inflows last month as investors continued to embrace more targeted fixed-income products amid high inflation.
While many investors kept cash on the sidelines last year, that should change this year, according to Goldman Sachs. Ashish Shah, chief investment officer of public markets at Goldman Sachs says “A lot of investors last year were frozen because of the volatility and uncertainty. As that uncertainty narrows, it’s really important for investors to take action.” Shah believes the Fed is closer to the end of the rate-hike cycle than it is to the beginning and rising inflation has begun to slow. With that in mind, Goldman is suggesting that now is the time to add duration to a portfolio through fixed income. Shah says “Cash in the portfolio of investors is still incredibly high. What we’re advocating [is that investors should] come out of cash in the bank and go into the market and capture some of this yield.” He added that while bonds are generating income, they also can rally even further than they already have. However, selection matters more now than it used to. According to Shah, investment-grade credit and municipal bonds with longer durations could be effective in achieving portfolio goals. He also noted that lower-quality muni bonds also have room to generate attractive yields and they’re tax-exempt.
Finsum:Goldman Sachs CIO Ashish Shah believes that now is the time to put cash to work in investment grade credit and municipal bonds as the Fed is nearing the end of its tightening cycle and inflation is starting to slow.
No matter where you look, fixed-income analysts are proclaiming 2023 as the year of the bond. But why will that be the case? According to fund firm Nuveen, “The anticipated rate decline, along with the higher starting yield, creates an attractive outlook for bonds this year.” The firm believes that the high starting yields this year could be setting the stage for a bond market comeback. According to Nuveen’s latest fixed-income report, over the last four and half decades, years that feature higher yields early on often produce higher returns by the end of the year. For example, in 1982, when the starting yield was 14.6 percent, the bond market gained 32.6 percent over the next 12 months. After consecutive rate hikes in 2022, the bond yield in early 2023 is at the highest level since the global financial crisis. The firm also believes that a slowdown in rate hikes could generate higher returns. While the Fed raised rates aggressively last year to curb inflation, it has indicated plans to move more gradually this year with recession fears growing. Since bond prices move inversely with yields, the firm says a drop in yields could create “potential price return opportunities.”
Finsum:Fund firm Nuveen is bullish on bonds this year due to an anticipated rate decline and a high starting yield.
Based on the latest treasury yield movements, investors are bracing for a recession. Yields on the benchmark U.S. 10-year Treasury note have fallen by around 83 basis points from their October high of 4.338% as investors sent $4.89 billion into U.S. bond funds last week. That marks the third straight week of net inflows. The bond rally comes after Treasuries had the worst year ever, driven by the Fed's tightening policy. The key driver for the current rally has been concerns over the Fed's rate increases sending the U.S. economy into a recession. Treasuries are typically seen as a safe haven during economic uncertainty. Investors expect the Fed to raise rates by another 25 basis points at the end of its monetary policy meeting today, while Wall Street is also looking for signs that the Fed will pull back on its hawkish stance amid falling inflation. Rob Daly, director of fixed income at Glenmede Investment Management told Reuters that "Things are coming off the boil here. There is a de-risking that's happening, and we're seeing flows out of equities into higher quality parts of the market such as fixed income." Although stocks have been rallying since late last year, investors are playing it safe, expecting the rally to end if a recession hits.
Finsum:While stocks have been in a mini rally since the end of last year, investors are playing it safe flooding U.S. bonds funds in the expectation of a recession.
After struggling under deficits for two decades, pension funds are now flooded with cash due to soaring interest rates. The surplus at corporate defined-benefit plans means managers can now reallocate to bonds, which are less volatile than stocks. This is called “derisking” in the industry. Mike Schumacher, head of macro strategy at Wells Fargo, said the following in an interview, “The pensions are in good shape. They can now essentially immunize — take out the equities, move into bonds, and try to have assets match liabilities.” That explains some of the rallying of the bond market over the last three or four weeks.” Last year’s stock and bond market losses actually helped some benefit plans, whose future costs are a function of interest rates. When rates rise, their liabilities shrink and their funded status improves. For instance, the largest 100 US corporate pension plans now have an average funding ratio of about 110%. According to the Milliman 100 Pension Funding index, that’s the highest level in more than two decades and great news for fund managers who had to deal with low-interest rates and were forced to chase returns in the equity market. Now managers can unwind that imbalance with most banks expecting them to use the extra cash on buying bonds and selling stocks to buy more bonds.
Finsum: Due to stock and bond losses and rising rates, pension fund managers now have a surplus of funds that they plan on allocating to bonds.
Fidelity expanded its active fixed-income ETF lineup with the launch of the Fidelity Tactical Bond ETF (FTBD). FTBD, which now trades on the NYSE Arca, has an expense ratio of 0.55%. The fund is co-managed by Jeffrey Moore and Michael Plage and is measured against the Bloomberg U.S. Aggregate Bond Index. The fund's portfolio can be allocated across the full spectrum of the debt market, including investment-grade, high-yield, and emerging markets debt securities across different maturities. Managers will consider the credit quality of the issuer, security-specific features, current and potential future valuation, and trading opportunities to select investments. The launch brings Fidelity’s lineup to 12 active fixed-income ETFs with about $3.9 billion in assets under management. Jamie Pagliocco, Fidelity’s Head of Fixed Income told VettaFi that “Fidelity is committed to offering investors choice and providing a diverse lineup of investment solutions. Fidelity’s fixed income lineup combines our extensive investment capabilities and expertise as an active manager to provide investors with a range of solutions across the fixed income risk spectrum and vehicle type, and Fidelity Tactical Bond ETF provides investors with another competitive offering to further expand client vehicle choice.”
Finsum:Fidelity expands its lineup of actively managed fixed-income ETFs with the launch of the Fidelity Tactical Bond ETF which can invest across the full spectrum of the debt market.
Putnam recently announced the launch of five new transparent, actively managed exchange-traded funds, including three fixed-income ETFs that build upon the capabilities and experience of the firm’s Fixed Income team. The bond ETFs include the Putnam ESG Core Bond ETF (PCRB), the Putnam ESG High Yield ETF (PHYD), and the Putnam ESG Ultra Short ETF (PULT). As part of the announcement, Carlo Forcione, Head of Product and Strategy at Putnam stated, “We are enthused about extending our ETF product shelf into the actively managed fixed income and non-U.S. equity spaces.” PCRB invests in bonds of governments and private companies located in the United States that are investment grade in quality with intermediate- to long-term maturities with a focus on issuers that Putnam believes meet relevant ESG criteria. PHYD invests in bonds that are below investment grade in quality which are obligations of U.S. issuers and have intermediate- to long-term maturities. The fund will also focus on issuers that Putnam believes meet relevant ESG criteria on a sector-specific basis. PULT invests in a diversified portfolio of fixed-income securities composed of short-duration, investment-grade money market, and other fixed-income securities, with a focus on issuers that the firm believes meet relevant ESG criteria on a sector-specific basis.
Finsum:Putnam recently launched three actively managed bond ETFs, including the Putnam ESG Core Bond ETF, the Putnam ESG High Yield ETF, and the Putnam ESG Ultra Short ETF.
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Last week, over $10.2 billion went into U.S.-listed ETFs, with the majority going into fixed-income funds. Bond ETFs pulled in $4.5 billion according to ETF.com data. This followed the previous week’s $7.8 billion in inflows that went into bond funds. In the first week in January, fixed-income products pulled in $9.4 billion, a jump from $1.5 billion in the last week of December. Investors are flocking to fixed-income exchange-traded funds as recession warnings ring louder. Investors are jumping from stocks to bonds as they are often seen as a safer investment during economic downturns. Earlier in the month, Bloomberg News reported that Wall Street firms are sounding the alarm for a recession in 2023. BlackRock’s Investment Institute stated that “a recession is foretold,” while Barclays is predicting “one of the weakest years for the world economy in 40 years.” This also comes after multiple Fed officials have predicted interest rates remain elevated for the foreseeable future. Federal Reserve Bank of San Francisco President Mary Daly said in a streamed interview with the Wall Street Journal a couple of weeks ago that “I think something above 5[.0%] is absolutely, in my judgment, going to be likely.” Her comments come a week after Minneapolis Fed President Neel Kashkari stated that the “central bank’s so-called terminal rate could reach as high as 5.4% before easing,” in a post on Medium.
Finsum:As Wall Street firms sound the alarm on a potential recession, investors are flocking to fixed-income ETFs, which are seen as safer investments during economic downturns.
While bonds are generally known for their stability, 2022 marked a deviance from the norm. The question for advisors is, how should they approach 2023? Mariam Kamshad, head of portfolio strategy for Goldman Sachs personal financial management, and Guido Petrelli, CEO, and founder of Merlin Investor spoke to SmartAsset to provide some guidance. First advisors should expect a return to the norm. Kamshad said 2022 was an unusually bad environment for bonds with the Federal Reserve raising rates to a 15-year high. She believes that's unlikely to repeat and expects both yields and capital gains returns to stabilize. Second, advisors should pay attention to inflation and government bonds. Kamshad believes that inflation is still the biggest issue in the economy and expects it to continue slowing in 2023, which would likely slow interest rates. Her team considers duration risk a better bet than credit risk. Kamshad's team also recommends investors consider government bonds. The team expects intermediate Treasurys to outperform cash. They also expect municipal bonds to pick back up. Petrelli recommends following the unemployment rate and the quit rate as they are “good metrics for the strength of the economy overall and a window into where bonds are headed.” He believes a potential recession is one of the biggest questions facing the bond market. In a recession, Petrelli expects investors to favor short-term bonds.
Finsum:According to two portfolio analysts, advisors should expect a return to the norm for bonds, but they should also keep an eye on inflation, government bonds, and the jobs report.
According to Vanguard, investors that allocated part of their portfolios to low-yielding municipal bonds at the beginning of last year should now be looking forward to the prospect of higher income, thanks to a rapid rise in rates. In a fixed-income report for the first quarter, the fund firm wrote, “Following a year with $119 billion of outflows from municipal funds and ETFs, we expect the tide to turn. For high-income taxable investors, we are expecting a municipal bond renaissance.” According to the report, muni bonds only offered yields of around 1% at the start of 2022, compared to yields that now exceed 3% before adjusting for tax benefits. Tax-equivalent yields are at 6% or even “meaningfully higher for residents in high-tax states who invest in corresponding state funds.” Vanguard said that this makes munis a “great value compared with other fixed income sectors and potentially even equities—especially with the odds of a recession increasing.” According to the Vanguard report, muni bonds also remain strong from a credit perspective, with attractive spreads over comparable U.S. Treasurys and corporate debt. In fact, municipal balance sheets are stronger now than they’ve been in two decades, leaving states well-prepared to navigate an economic slowdown.
Finsum:According to Vanguard, higher yields and solid balance sheets make muni bonds a highly attractive option for investors this year.
Last year, portfolios that were allocated to 60% stocks and 40% bonds were hammered, as both the stock and bond markets sustained heavy losses. The portfolio has generally yielded steady gains with lower volatility since the two asset classes typically move in opposite directions. However, the strategy backfired last year after the Fed’s tightening policy sent stocks tumbling from record highs and drove Treasuries to the worst losses since the early ‘70s. This made advisors and investors question the viability of the 60/40 model. But the bond market’s selloff last year pushed yields so high that analysts at BlackRock, AQR Capital Management, and DoubleLine expect fixed-income securities to breathe new life into 60/40 portfolios. This year, both stocks and bonds have gained, propelling the 60/40 portfolio to the best start to a year since 1987. Their view is supported by the expectations that the Fed is nearing the end of its tightening policy as inflation comes down. If this view turns out to be correct, it reduces the risk of bond prices falling again and allows them to once again serve as a hedge against a potential drop in equities stemming from a recession. In a note to clients, Doug Longo, head of fixed-income strategists at Dimensional Fund Advisors, wrote “Expected returns in fixed income are the highest we’ve seen in years.”
Finsum:Based on the view that the Fed is nearing the end of its tightening cycle, analysts expect fixed-income securities to once again serve as a hedge against stocks in the 60/40 portfolio.