Displaying items by tag: fixed income

In an article for ETF.com by Michelle Lodge, she examines whether success in portfolio management is a matter of skill or luck. According to survey results from S&P Dow Jones, there is little connection between good choices made by a manager and portfolio performance. 

According to Craig Lazarra, the Director of Index Investment Strategy at S&P Dow Jones, “Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods.” 

According to the research, investors are better off with low-cost, diversified ETFs. Additionally, success in terms of picking stocks and ETFs is not repeatable. Additionally even in a poor year for passive funds, 51% of active managers still underperformed their benchmarks in 2022. 

Another piece of evidence cited is that managers who outperformed in the first half of the last decade, failed to outperform in the second-half of the decade. The same dynamic appears with active fixed income managers with no indication that success in one year is likely to repeat in subsequent years. 

Finsum: Research shows that active fixed income and equity outperformance is unlikely to repeat in following years.  

2022 was one of the worst years in memory for fixed income amid raging inflation and a hawkish Federal Reserve. Yet, conditions are much more favorable for the asset class in 2023 given a slowing economy and decelerating inflation. In an article for TheStreet’s ETF Focus channel, David Dierking discusses why short-term fixed income ETFs are a compelling option.

While, it’s likely that the Fed is done raising rates for now, the resilient economy and labor market mean that rates are likely to stay ‘higher for longer’. This favors fixed income with shorter maturities as investors can take advantage of high yields.

ALready, we are seeing this manifest as short-term bond ETFs were the recipient of 21% of net bond ETF inflows in Q1, even though they only account for 8% of the fixed income universe by total assets. 

Additionally, many investors treat short-term bond ETFs as a cash equivalent given that they are extremely liquid, while paying generous yields. In fact, Fed policy is essentially encouraging this trade given the extremely inverted yield curve and rally in long-duration fixed income since March of this year. 

Finsum: Short-term fixed income ETFs are seeing major inflows this year and are an intriguing option in the current market environment.

Elizabeth O’Brien covered the optimism among bond investors that a change in Fed policy could result in a major rally for the asset class in a Barron’s article. Current fed futures odds show that the market sees a more than 90% chance of the Fed pausing at its next meeting. And given recent inflation and economic data, it’s likely that the Fed has seen sufficient progress to shift its focus to financial stability over combating inflation.

Therefore, it could be an opportune moment to invest in high-quality bonds with longer maturities. These bonds are yielding about 5% which is nearly double what they averaged during the past decade. 

While some believe that the economy is weakening enough to compel the Fed to cut rates by the end of the year, others believe this is a more typical cycle and that the Fed will likely be on hold for an extended period of time. 

Since 1990, the average pause between hiking and cutting cycles has been 10 months. The typical behavior is that fixed income rallied in anticipation of cuts but volatility picks up until the cuts actually begin, leading to a healthy tailwind for the sector. 

Finsum: A major catalyst could be emerging for fixed income given that the market expects the Fed to pivot at its next FOMC meeting in June.

In an article for the Financial Times, Mary McDougall reported on growing investor nervousness regarding junk bonds due to tightening credit and financial conditions. According to the Federal Reserve’s survey of Senior Loan officers about 46% of banks are planning to tighten lending standards given worries about defaults and recent stresses to the banking system. 

Historically as lending standards tighten, it leads to a wider spread between junk bonds and Treasuries, indicating concerns over growing defaults. This can even potentially exacerbate a recession as companies have tougher times accessing capital markets which can affect corporate decisions,leading to belt-tightening and job losses. 

What’s interesting is that many expected that the regional bank failures that began in March would have impacts on spreads and lending. Yet, there hasn’t been an impact yet. In fact, the entire bond complex has been quite strong since these stresses began as many interpreted it as increasing the odds of the Fed pausing rate hikes. 

The Federal Reserve also seems to share these concerns as Chair Powell discussed the possibility of a credit crunch and that it poses one of the major risks to its economic outlook and financial stability. 

Finsum: Despite the Fed’s rate hikes and regional banking concerns, lending and spreads have remained relatively resilient, but some are concerned that this won’t last. 

Category: Wealth Management; 

Keywords: #bonds; #Fed; #fixed income

In an article for AdvisorPerspectives, Edward Perks of Franklin Templeton shared his reasoning for why fixed income should outperform equities in the near term. 

First, he sees that inflation is trending lower, but there still needs to be more progress before the Fed would actually start cutting rates. Further, he acknowledges recent stress in the banking system but doesn’t see it spreading to other sectors and becoming a more significant issue which would force rate cuts. 

This should lead to a positive scenario for fixed income with longer-term rates bending lower, short-term rates plateauing, and inflation gently moving lower. However, he does believe that the economy will keep slowing so that corporate earnings will soften into the second-half of the year and 2024. 

Due to these factors, he recommends a 60/40 allocation with a larger tilt for fixed income over equity. It’s also possible that the allocation could change even more if the economy stumbles into a recession. The firm is particularly bullish on investment grade credit as it offers compelling value with strong upside especially if Franklin Templeton’s base case economic scenario plays out. 

Finsum: Franklin Templeton is quite constructive on fixed income but less so for equities. Here’s why it’s recommending a 60/40 allocation tilted towards bonds.