Bonds: Total Market
Fixed-income professionals at Franklin Templeton and its affiliates expect fixed-income investments to be a safe haven from equities volatility since the financial markets are showing signs of stress. Tracy Chen, a portfolio manager at Brandywine Global, stated that “We believed something would break, even before this banking crisis happened. Now bonds provide safe haven protection for people’s portfolios because our timeline for recession is pulled forward because of this banking stress.” She recently spoke at a webinar on fixed-income mega-trends, entitled “Navigating Rates and Risk.” She was also joined by Jennifer Johnston, senior vice president and director of municipal bond research at Franklin Templeton, and Annabel Rudebeck, head of non-US corporate credit at Western Asset. Currently, yields are around 5% for corporates, which is considered attractive when compared to the longer-term history and government issuances. Johnston added that the tax-free attributes of municipal bonds provide an extra boost, while the muni market tends to be of higher quality than the corporate market. She stated, “We do see some opportunities, particularly out long, where munis are still relatively cheaper than where they’ve been in the past.” Chen also added that “This banking stress is very unique. It’s not driven by credit risk, but by mismanagement of duration.”
Finsum:With the financial markets showing stress, bond professionals at Franklin Templeton and its affiliates believe that fixed-income instruments provide a safe haven for the current stock volatility.
Investors poured into U.S government bonds Monday after last week’s collapse of Silicon Valley Bank. This sent Treasury yields plunging. The 2-year Treasury yield was recently trading at 4.06%, down 100 basis points or a full percentage point, since Wednesday. This marks the largest three-day decline for the 2-yield since Oct. 22, 1987, when the yield fell 117 basis points. That move followed the October 19th, 1987 stock market crash, which is also known as “Black Monday.” The yield on the 10-year Treasury was down just under 20 basis points. Prices soared and yields fell after news of the collapse of Silicon Valley Bank. Regulators took over the bank on Friday after mass withdrawals on Thursday led to a bank run. Regulators announced on Sunday that they would guarantee Silicon Valley Bank’s depositors. With fears of contagion across the banking sector spiking, investors looked to government bonds for safety. Investors are also rethinking how aggressive the Federal Reserve will be with rate hikes after the bank’s collapse. This helped to send short-term yields lower. The Fed is meeting next week and was expected to raise rates for the ninth time since last March. However, Silicon Valley Bank’s collapse may change that. Goldman Sachs certainly thinks so. The investment bank no longer thinks the Fed will hike rates, citing “recent stress” in the financial sector.
Finsum:After Silicon Valley Bank’s recent collapse, fears of contagion across the banking sector spread, driving investors into Treasury bonds, which sent yields tumbling.
In a recent article for John Hancock’s Recent Viewpoints, Steve L. Deroian, Head of Asset Allocation Models and ETF Strategy offered his take on why active fixed-income ETFs provide value. Deroian noted that while active ETFs have slowly gained traction since they first appeared in 2008, there have been recent signs that investors are becoming more interested in gaining exposure to active management in ETFs. In fact, since 2008, the number of active fixed-income ETFs has grown exponentially. In John Hancock’s opinion, one factor behind the rapid growth is the changing composition of the U.S. bond market over the past ten years. Passive strategies have become much more concentrated in government debt. At the end of December, Treasuries accounted for over 40% of the Bloomberg U.S. Aggregate Bond Index, while the duration of the index has risen and is now at more than six years, indicating passive fixed-income ETFs carry a fair amount of interest-rate risk. Active fixed-income ETFs, on the other hand, aren’t required to track the benchmark. They can instead shift duration based on the manager’s outlook for interest rates. The management team can also manage sector allocation based on its ability to find relative value opportunities. Since the range of returns between fixed-income sectors can often be large, this creates an opportunity for active managers to add value over time.
Finsum:The number of active fixed-income ETFs has grown exponentially and John Hancock’s Steve L. Deroian believes one reason for that is the concentration of government debt in passive bond ETFs that carries a fair amount of interest-rate risk.
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According to Morningstar's separate account/collective investment trust database, the top-performing fixed-income managers in 2022 managed to post positive returns during a historically tough year for the asset class. Five of the top 10 managers were in Morningstar's ultrashort bond category, while three were in the multisector bond category. The remaining two included one in the non-traditional bond category, and one, which was the top overall, in Morningstar's muni national long bond category. That top-performing strategy was the 16th Amendment Advisors LLC's Vicksburg strategy, which posted a gross return of 46.03% for the year. John J. Lee, a co-founder and managing member of the firm, said in an email to Pension & Investments, that the strategy benefited from a "cautious and bearish outlook on interest rates in general. Further, it took advantage of the disarray in the marketplace due to sharply rising rates and historically volatile markets." Lee said that it “holds investment-grade municipal bonds, corporate bonds, and their hedges in a strategy that is targeted to investors looking for non-correlated high-grade fixed-income exposure.” The second-ranked strategy was T. Rowe Price's dynamic global bond strategy, which returned 4.66% for the year. The strategy falls into Morningstar's non-traditional bond category and holds U.S. and international debt securities.
Finsum:According to Morningstar's SMA/CIT database, five of the top ten performing fixed-income managers were in the ultrashort bond category, three were in the multisector bond category, while the top two overall were in the muni national long bond category and the non-traditional bond category.
According to Investment Metrics' most recent fee analyzer report, active management fees dropped last year after underwhelming returns. U.S. fixed-income managers saw the largest reduction in fees, with a 7% average annual cut. In fact, post-negotiated fees for active managers decreased in most categories last year. The report was based on the analyses of almost 490 distinct accounts and co-mingled funds. According to Investment Metrics, the fee reduction trend appears to correspond to poor performance of active managers as most categories fell short of beating their standards. Scott Treacy, a research consultant at Investment Metrics, wrote the following in the report, “Normally, the fixed-income asset class protects investors when equity markets crater, but that did not happen in 2022.” He added, “Active U.S. fixed income disappointed in particular. Unfortunately, at a median level, active managers were not able to perform well in this environment.” While active managers had a chance to demonstrate that their expertise could shield portfolios during the downturn, the underwhelming results may put greater pressure on active strategies. Treacy concluded that “Those active managers that were not able to perform in the down market of 2022 will most likely see their assets go to passive strategies, or to other active managers that performed well in this difficult environment.”
Finsum:Active management fees dropped last year after managers produced underwhelming returns, with U.S. fixed-income managers seeing the largest reduction in fees.
One of the top financial stories in 2023 so far is the hot bond market. But it’s not just true for institutional investors, retail traders are also piling into bonds. One reason for this is that it has never been easier to buy Treasuries. They can be bought directly from the Treasury Department, at discount brokerages, or accessed through ETFs. It is also due to a huge shift in fixed income as rate expectations have sent yields on bonds to their highest in years. The 2-year, 10-year, and 30-year treasuries are all yielding around 4%. In fact, retail traders are so honed in on buying bonds, they've crashed the TreasuryDirect website repeatedly. Shawn Cruz, Head Trading Strategist at TD Ameritrade, recently told Yahoo Finance that “For pretty much the entire decade, leading up to this year, when people asked about retail and fixed income, I could just simply say, ‘no one really cares.’ The past year, that has significantly changed.” Sales of Treasury bills with maturities of one year or less through TreasuryDirect were $12.0 billion in January, a new record. BlackRock, the largest provider of ETFs by assets, has also benefited from this boom. So far in 2023, investors have poured $9.9 billion into U.S. iShares fixed-income ETFs.
Finsum:Retail traders are piling into bonds this year due to easier access to Treasuries and the highest bond yields in years.