A changing interest rate narrative prompted many advisors and investors to reevaluate their bond exposures this month. Asset managers stepped in to offer their perspectives on the changing market dynamics and where the risks and opportunities lie in the 2024 Fixed Income Symposium hosted by VettaFi.
The symposium took place on April 18 and covered a range of fixed income topics. These included an interest rate outlook, short-duration bond investing, multi-sector bond investing opportunities, and more.
“While the Fed’s potential next move was in focus, what stood out was the array of choices advisors have using ETFs and mutual funds,” Todd Rosenbluth, head of research at VettaFi and co-host of the Symposium said afterward. “The chance to hear the best ideas from top providers all in one place was exhilarating.”
Positioning Fixed Income Portfolios for Interest Rates
Much of this Fed rate hiking cycle has been markedly different compared to previous cycles. Alex Obaza, CFA and portfolio manager at T. Rowe Price, believes the rate decline will follow an equally unique path. Whether rate cuts happen later this year, are pushed to 2025, or even the possibility of a rate increase, investors must plan for a wide range of potential outcomes.
“Today we see the potential for a lot more dispersion amongst central banks in terms of where we are for the cutting cycle,” explained Sonali Pier, managing director and PM at PIMCO. Investors must consider the relative value in global rates when investing.
The pair went on to discuss yields, the merits of adding duration, diversification, asset class dispersions, and more.
Find more detailed coverage of the session here: “Positioning Portfolios for Rate Cut Uncertainty”
Getting off the Sideline and Into Short-Term Bonds
Investors still have a significant amount of money this year, not unsurprising given money market rates in recent months. In an inverted yield-curve environment, extending duration feels counterintuitive according to Julian Potenza, CFA, PM at Fidelity Investments. However, not adding some duration before rate cuts begin will likely lead to regret down the road Potenza explained.
Doug Longo, head of fixed income portfolio strategists at Dimensional, discussed the Fed Funds market pushing back rate cut expectations to September at the earliest. Higher rates for longer benefit short-duration positions, which several of the firm’s funds invest in.
The two discussed the merits of short and ultra-short-duration bonds, locking in yields, and more.
Is Added Interest Rate Risk Worth it?
Pockets of opportunity exist for investors to take advantage of the current market environment. Mark Cintolo, CFA, CAIA, VP, and portfolio consultant at Natixis Investment Managers, sees benefits to increasing duration, given the likelihood of rate cuts in the next six-12 months. Investors capturing and locking in yields would benefit once rate cuts begin.
Meanwhile, the credit market offers non-correlated performance while remaining overlooked by investors. That’s according to Dominic Nolan, CFA, CEO of Aristotle Investment Services and adviser to Aristotle Funds.
The discussion touched on the current lack of broad inflation reacceleration, why the Fed should reevaluate its 2% inflation rate goal, credit market performance, and more.
Diving Into Securitized Debt
Securitized debt makes up roughly one-fourth of the U.S. bond market and covers a range of types. Following behind Treasuries, they’re the most invested in bonds according to Laura Mayfield, Assistant VP and senior PM at Fort Washington Investment Advisors.
“The higher quality parts of the capital structure we think are priced attractively,” Mayfield said. High-rated securitized debt also provides “greater protection from the wide range of elevated volatility drivers that we think are relevant right now.”
Investing in securitized debt offers a range of diversification across types of debt as well as risk tolerance. The majority of the market falls into either floating rate or 5-6 year durations according to Jeffrey N. Given, CFA, senior PM, co-head of U.S. core and core-plus fixed income at John Hancock Investment Management. It makes investing in securitized debt attractive in the current rate environment.
“We do think the broad securitized market will do very well in a rate-cutting environment,” Given said.
Fort Washington Investment Advisors offers the Touchstone Securitized Income ETF (TSEC) and the Touchstone Ultra Short Income ETF (TUSI). John Hancock offers the John Hancock Mortgaged Backed Securities ETF (JHMB).
How to Think About Adding Credit Risk
“I know we keep asking ourselves ‘When is the year of fixed income?” Jason Greenblath, VP and senior PM at American Century Investments, acknowledged. For many credit investors, taking on additional risk in the last six months paid off in attractive yields.
Issuance of high yield and corporate investment-grade bonds rose sharply in the first quarter. Yields continue drawing investors into credit explained Matthew Wrzesniewsky, VP and fixed income strategist at Goldman Sachs Asset Management.
The pair discussed credit spreads and carry, active management benefits, where to find opportunities, and more.
Find more detailed coverage of the session here: “Where Are Asset Managers Taking on Credit Risk?”
Opportunities in Multi-Sector Bond Investing
Rising yields present investors with a number of opportunities within bonds. Investors can lock in 5% yield-to-maturity within investment-grade corporates that will last them up to 10 years. Harnessing exposure to quality bonds at what is historically a high yield rate is a rare opportunity. That’s according to Justin Danfield, fixed income ETF strategist at Invesco.
“The risk-adjusted returns for fixed income versus equities is excellent right now,” explained Nathan Kehm, CFA, VP and senior PM at Federated Hermes.
The two discussed moving out further in duration to lock in yields, the impact of real rates, higher risk areas within bonds, and more.
Find more detailed coverage of the session here: “Invesco’s Justin Danfield on Risk Mitigation for Bond Investing”
Don’t Miss Out on CLOs and Bank Loans
Collateralized loan obligations (CLOs) hold a pool of 150-300 senior securitized loans. They’re actively managed and offer exposure to the floating rate debts of senior loans. These bonds hold strong appeal in rising-rate and high-rate environments. They provide income without carrying duration risk should rates rise.
“We think they’re a great diversifier to a core type portfolio,” explained Jason Duko, executive VP and PM at PIMCO.
For investors not wanting to take on added credit risk, the CLO market provides options. Some strategies only invest in high-rated, low-risk AAA securities. This allows investors to capture income without adding on significant risk. For those with a higher risk tolerance, the BBB and BB-rated tranches offer opportunity according to Tim Wickstrom, managing director at Panagram. What’s more, CLOs offer lower default rates on a historical basis compared to corporate bond defaults.
“If you take all rating classes across all AAA to single B historically, cumulatively it’s less than 1 percent” for defaults Wickstrom explained. It’s “astonishingly low default rates for these assets.”
PIMCO offers the PIMCO Senior Loan Active Exchange-Traded Fund (LONZ). Panagram offers the Panagram AAA CLO ETF (CLOX) and the Panagram BBB-B CLO ETF (CLOZ).
Why Active ETFs Prove Beneficial Within Fixed Income
Active strategies continue to carve out market share as broad uncertainty persists. Advisors looking to capture active bond strategies now have a range of options within ETFs to pair alongside their mutual funds and other portfolio holdings. However, active strategies aren’t just for rainy days.
“Active management is absolutely critical, I would argue… in all market environments,” said Margaret Steinbach, fixed income investment director at Capital Group.
When looking to invest in active strategies, advisors should do a bottoms-up analysis of issuers. They also need to weigh interest rate risks and exposures as well as the tenure of the management team of individual funds.
Emma Friend, ETF marketing lead at Capital Group, also discussed advisor sentiment towards active bond ETF strategies. The firm offers the Capital Group Core Plus Income ETF (CGCP).
A Guide to Second-Half Fixed Income Investing
Forecasts range for what the second half will bring economically, for inflation, and for rates. Tim Anderson, CFA, lead multi-asset PM at Riverfront Investment Group, believes the economy may slow slightly but remain strong.
On the other side of the coin, Mark McNeil, CFA, senior VP, client services fixed income at TCW, believes the full impact of Fed rates still lags and will catch up this year. This in turn will prompt a mild recession later this year. McNeil cites the peak of jobs-related data as well as increased credit usage and delinquencies by consumers as signs of rate stress.
The pair discussed locking in yield on longer duration, balancing equity volatility and drawdowns, and income opportunities in the second half. Funds discussed include the First Trust TCW Opportunistic Fixed Income ETF (FIXD) and the RiverFront Strategetic Income Fund (RIGS).
To watch the full symposium and receive CE credits, register for the replay here.
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