Bonds: Total Market
Blackrock expanded its fixed-income ETF lineup with the launch of the BlackRock AAA CLO ETF (CLOA). The fund, which was launched on January 10th, seeks to provide capital preservation and current income by investing principally in a portfolio composed of U.S. dollar-denominated AAA-rated collateralized loan obligations (CLOs). According to Investopedia, a CLO is a bundle of loans that are ranked below investment grade. While the underlying loans are rated below investment grade, most CLO tranches are typically rated investment grade due to credit enhancements and diversification. CLOs have historically only been available to institutional investors, but Janus Henderson launched the first CLO fund in an ETF wrapper in October 2020. That fund, the Janus Henderson AAA CLO ETF (JAAA) was clearly able to find an audience since the fund currently has close to $2 billion in assets under management. This bodes well for CLOA, which has an expense ratio of 0.20%, six basis points cheaper than JAAA. Investors have been attracted to CLOs due to low volatility, low downgrade risk, and low correlations with traditional fixed-income assets. CLOA currently has a weighted average coupon of 5.40 and a weighted average maturity of 4.24 years.
Finsum: Blackrock launched an AAA CLO ETF to take advantage of investor CLO interest due to low volatility, low downgrade risk, and low correlations with traditional fixed income.
While rising interest rates last year battered both stocks and bonds, the rise in rates brought higher yields to the fixed-income market. According to Dow Jones Market Data, the yield on the 10-year Treasury note rose 2.330 percentage points in 2022 to 3.826%, its largest annual gain on record. The two-year Treasury yields surged 3.669 percentage points to 4.399%, while the 30-year yield jumped 2.046 percentage points to end the year at 3.934%. These marked the largest annual increases ever for those notes. The jump in yields drove investors into fixed-income ETFs last year, with BlackRock's iShares dominating inflows. In a phone interview with Morningstar, Salim Ramji, BlackRock's global head of iShares and index investments, stated "We had record flows even in one of the worst fixed-income markets. We were twice the next competitor." Based on data from Morningstar Direct, iShares attracted around $100 billion in 2022, the most among U.S.-listed ETFs that invest in fixed income. Vanguard saw the second biggest fixed-income ETF inflows with around $49 billion, followed by State Street with about $21 billion. The most popular fixed-income ETF based on inflows last year was the iShares 20+ Year Treasury Bond ETF (TLT), which gathered around $15 billion.
Finsum: In an ugly year for fixed-income markets, bond ETFs continued to see strong inflows due to higher yields with Blackrock’s iShares leading the pack.
According to the new InspereX 2023 Advisor Outlook Survey, 74% of financial advisors said they expect the inverted yield curve between the 2-year and 10-year Treasuries to continue into the second quarter of 2023. This includes 40% who expect it to last beyond the third quarter. An inverted yield curve occurs when short-term yields are higher than long-term yields. It is also often considered a signal for a recession. InspereX provides advisors, institutional investors, issuers, and risk managers deep access to fixed-income market data across asset classes. The survey was conducted between November 8th and 21st, 2022, among 270 financial advisors by Red Zone Marketing. The respondents represented advisors from independent and regional broker-dealers, banks, and RIAs. InspereX President David Rudd stated, “While many advisors are bullish on stocks in 2023 and optimistic about moderating inflation, their views on a continuation of the inverted Treasury yield curve indicate that the first half of the year could be bumpy.” However, advisors also believe that rising inflation is over, with 75% saying it has peaked. While many advisors say their clients are concerned about fixed-income volatility, they were not too scared to invest in fixed-income right now. In fact, the survey found that 68% of advisors are using individual bonds with their clients, mainly for income (56%) and diversification (23%).
Finsum:A recent survey revealed that advisors are concerned that the inverted yield will continue into next year, indicating the possibility of a recession.
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Inflation? Well, here’s some breaking news – even if CNN’s come to frown upon them lately: it’s still hitting nosebleed levels, according to gsam.com. What’s more, the wider economic environment, and the labor market, especially, has strutted its mettle.
Yeah; wow. Maybe – just maybe – the network will reconsider its spanking new policy.
In any event, it means the central banks will continue to rachet up rates. The question then becomes that since monetary policy impacts the economy with a lag, will they head north too far and quickly. From GSAM’s perspective, market stabilization will demand signs of inflation topping out, not to mention hawkishness and real yields.
”Higher inflation and higher growth volatility are propelling us into a higher yield environment, marking a departure from the post-financial crisis era,’ said Whitney Watson, global head of Fixed Income Portfolio Management, Construction & Risk at Goldman Sachs Asset Management. “Ultimately, we think this presents opportunities in high-quality fixed income assets, such as investment grade corporate bonds and agency MBS.”
Meantime, it seems bonds will be back in vogue with investors next year, according to schwab.com.
And it’s a real change of pace. Following subpar yields stretching years, and in the aftermath of the extremely hard knocks endured by prices in 2022, a bounce back appears to be in store in the fixed income markets.
You go, ETFs. More and more, they’re a key component in the evolving fixed income terrain, according to insuranceaum.com. That tidbit surfaced in a survey of 700 institutional investors and investment decision makers.
The download on ETFs:
- Being leveraged for portfolio construction – and that includes non-core allocations
- Playing a liquidity role as investors step up allocations to non-liquid sources of income
- Helping to facilitate the internalization of fixed income management
- Enabling investors to implement, with precision, ESG objectives
Meantime, the New York Stock Exchange’s not only about the peaks and valleys of the market.
And, hey, who doesn’t need a respite from that maddening merry go round?
Assets under management in fixed income ETFs swelled from $574 billion in 2017 to $1.28 trillion last year, according to data recorded by the exchange, reported ssga.com. Wait, there’s more: during the same timeframe, the number of funds leaped from 278 to almost 500.
Jump starting the juices on current income is the primary intent of ETF’s, according to entrepreneur.com. The story appeared originally in Stock News. Capital appreciation’s a secondary objective. The fund’s hopping, too, with $4.78 billion in assets under management, not to mention 1307 holdings.
China has more than protests on its place these days; it’s also ratcheted up its standards on requirements for ESG disclosure, according to linkedin.com.
The country’s banking and insurance regulators sent its most powerful signal to date that supporting the green economy also should be on the plates of banks insurers. New guidelines were introduced by the China Banking and Insurance Regulatory Commission making it incumbent upon on banking insurance entities to set forth strategies, processes and capacity to abet the transition to a sustainable future.
Typically, these measures change the duties of investors to blend ESG factors into investment decisions and stewardship and keep in mind beneficiary or client sustainability preferences. What’s more, they must report to their beneficiaries or clients.
Since the growth of China’s ESG market works in conjunction with the development of the country’s green finance market, when it comes to ESG policy, it’s a no no to talk it over if the evolution of the country’s green finance policies aren’t kept in mind, according to sixthone.com.