There is nothing like an international conflict to generate a flight to safe assets, and as much pressure as treasury bond prices have taken in the last year, they are still the world’s premiere safe asset. Inflows post Russia’s invasion of Ukraine have lowered Treasury yields and raised bond prices. Additionally it appears that markets are either dubious of the Fed’s rate hikes or just don’t think it will take as many to get the jobs done. Regardless, many bond ETFs, particularly around treasuries have benefited such as the iShares 7-10 Year Treasury Bond ETF and the iShares 20+ Year Treasury Bond ETF which were up 2.0% and 2.6% respectively in the last week.
Finsum: Treasuries are still the global safe asset and they are still in short supply given the abnormally low levels of U.S. interest rates.
Bond yields have been on a rollercoaster and the market seems to be having trouble making up its mind about the direction. On the one hand investors are fearful over Fed rate hikes and, increasingly, how soaring oil prices will drive up inflation. On the other hand, there is an element of anxiety that the war in Ukraine might scuttle global growth, which would point towards lower yields in the future. Perhaps the worst outcome though is both: stagflation.
FINSUM: In our view, the whipsawing of yields is misguided. Oil is not a big enough component of the economy to cause inflation to spin out of control and if you compare the macro outlook of today to three weeks ago, it is clearly more bearish. Thus, we think yields will trend downward so long as this conflict continues.
2021 was an all-time year for active fixed income launches, and 2022 is looking to continue that pace. Capital Group just debuted another active fixed income ETF to capitalize on this financial trend. The Capital Group Core Plus Income ETF (CGCP) will seek a higher income return for a traditional bond fund and really seek to maximize total return. With a wide swath of debt available in their targets, they can invest over a third in below investment grade securities. This launch comes amid 5 other active equity fund launches for Capital Group. Overall investors are looking for more alpha return in their portfolios and are looking to active management to find it.
Finsum: Macro factors are pushing more investors into active bond funds, with increased interest and inflation risk core analysis is more effective than ever in fixed income.
Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are under duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.
Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.
There has been an explosion in active fixed income flows in the last year. The big drivers that are pushing investors in that direction are mainly macro, as the Treasury yields have risen (lowering bond values) and passive funds haven’t moved off them rapidly enough. The other big factor is that they have flat-out outperformed. Where active equity lagged their passive counterparts data shows that almost 9 in 10 active bond funds have outperformed in the intermediate range. Overall this drove the $350 billion influx in active fond funds last year. Additionally, there were tax advantages when it came to capital gains and this efficiency was prioritized by investors.
Finsum: It's clear that the information cycle in active equity is currently outpacing the ability to beat the market, but bonds' medium-term macro influence is more predictable for active management.
Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are on duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.
Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.
Investors have been flocking to strange corners of the fixed income market as pressures are rising from both the Fed and inflation. The latest place investors are finding relief is floating rate investment-grade corporate debt. Corporations were reluctant to create in the early stages of the pandemic to supply floating rate debt with yields near zero on government debt. However, there is a huge demand for floating-rate debt today, and large investment banks like JPMorgan, Morgan Stanley and Citigroup Inc. are all jumping into the investment-grade bond market. Floating rate risk allows investors to mitigate duration risk which with rate hikes pending is a potential threat.
Finsum: This could be just the start of the trend or there could be a lot more to come, but look for the less used avenues of the debt market to start to spark with fixed income in the place it's in.
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Goldman Sachs lowered their most recent median projection for equities, putting the year-end target for the S&P 500 at 4,900. It's clear the markets hadn’t accurately priced in the Ukraine risk which could be worse in Goldman’s eyes than the 2014 Crimea annexation. Additionally, Goldman warned that if inflation continues to be worse than their expectations and faster rate hikes are needed the S&P 500 could decline by up to 12% to 3,900 by end of 2022, and if a recession occurs when the trough is lower yet. The best plays are in industrials and consumer discretionary, but still, energy leads the way.
Finsum: In lockstep with Goldman, a recession is a worst-case scenario. The TIPs market says inflation expectations are still moderate, so they shouldn’t overact to inflation.
Many investors are fretting over the rising bond yields which are sending their prices tumbling, but this could just be the tip of the iceberg. The aggregate bond index AGG has already fallen 3.9% and that's with the critical 10-year T-bill only rising to a 2% yield. If the 10-year hikes all the way up to its high of 3.25% in 2018 that could be a disaster. With inflation at a 40-year high that's a real possibility and any yield you are getting is all eaten away at. However, if inflation is temporary (caused by supply chains) or Fed pulls breaks fast enough then yields might be maxing out, and bond prices could turn around.
Finsum: Inflation expectations are remarkably low which means that investors are convinced either the Fed will credibly bring inflation down or as supply chains loosen that will bring inflation down. Markets are saying that bond risk is priced in.
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Many investors are fretting over the rising bond yields which are sending their prices tumbling, but this could just be the tip of the iceberg. The aggregate bond index AGG has already fallen 3.9% and that's with the critical 10-year T-bill only rising to a 2% yield. If the 10-year hikes all the way up to its high of 3.25% in 2018 that could be a disaster. With inflation at a 40-year high that's a real possibility and any yield you are getting is all eaten away at. However, if inflation is temporary (caused by supply chains) or Fed pulls breaks fast enough then yields might be maxing out, and bond prices could turn around.
Finsum: Inflation expectations are remarkably low which means that investors are convinced either the Fed will credibly bring inflation down or as supply chains loosen that will bring inflation down. Markets are saying that bond risk is priced in.
Active management seems to be making a comeback, and adding to that rising rates have many investors eyeing fixed income. For overall active funds in 2020 and 2021, it was a nearly a 50/50 shot that they would outperform similar passive counterparts; in other words virtually no advantage. However, research shows that passive equity has an advantage but over the past 10-years active fixed income leads the way over passive funds. In the last decade, the average bond manager beat the Bloomberg Aggregate Bond Index nearly three-fifths of the time. However, fixed incomes risk mitigation isn’t captured here, and active funds have the advantage to adjust the risk factor over passive funds, carrying an additional advantage.
Finsum: The ultra-low interest rate environment has been the difference-maker for fixed income managers who have just capitalized better than passive funds.
Inflation surged to a nearly 40-year record high as the CPI index annual inflation pushed to 7.5%. This number was well above expectations and even core inflations 6% posting came in higher than consensus. In response, the Fed is going to tighten and do so significantly as regional Fed Presidents are expecting a 1% rise in the Fed Funds rate. This is a seriously hawkish turn and given there are only 3 more FOMC meetings with projections that would imply a 50-basis point rate hike possibility. The fed hasn’t hiked rates that quickly since the turn of the century. Investors are saying the Fed will want to hike by 50-basis points to keep its credibility.
Finsum: Hikes that steep could destroy the record recovery the US has had, it could lead to major windfalls in equities markets.
Everyone and their dog has been pivoting to ultra-short duration pseudo-cash bond ETFs in the fixed income balance of their portfolio and this is causing a sell-off of lots of corporate bond ETFs. LQD saw its fifth day of outflows which set a pandemic era record. This brought together a total of $856 million in investor outflows. This is part of a blogger trend where sentiment around investment-grade bonds is weakening. However, it's not because they are less likely to pay back but more a reflection of investment-grade corporate debt generally having a longer duration, which is the risk investors don’t want with upcoming rate hikes.
Finsum: The risk premium hasn’t changed with corporate debt just the term structure risk. Fundamentally these bonds could still be in a good place.