Adapting to Challenges in Today’s Fixed Income Markets

As we explore the current fixed income market, investors should consider the risks associated with inflation and consider alternative strategies on the loan and credit space.

In the recent webcast, Beyond Basic Bonds: Innovative ETF Strategies to Fix Fixed Income, Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, pointed out that rates-sensitive segments added another month of gains and were close to recouping all of their losses from earlier this year, with notable stability coming out of U.S. Treasury Inflation Protected Securities that were supported by both increasing inflation and declining yields in July.

Meanwhile, Global investor confidence ticked higher, supported by upbeat investor sentiment in the US even as Asian investor confidence was a detractor, with the State Street Confidence Index moving above the neutral level first time since January.

Additionally, U.S. Dollar futures positions turned positive for the first time in more than a year last month, while traders also covered their short positions on Treasuries.

ETF asset flows also revealed investor preferences in the fixed income space. High yield bond funds have been in outflows all year, as below investment-grade investors favored loans for income in this market. TIPS ETFs continue to take in assets as well. Looking ahead, Bartolini projected that fixed income flows are likely to break annual records in 2021.

Kimberly Woody, Vice President, Senior Portfolio Manager, and Senior Investment Analyst at GLOBALT Investments, highlighted the increased amount of government and corporate debt levels in the current market environment, even as bond yields linger around three-decade lows. Meanwhile, the inflation/deflation uncertainty has increased.

Bartolini argued for a potential bullish outlook on fixed income markets after the 10-year treasury yield crossed below its 200-day moving average support level, a potential signal that rates could fall further. The 50-day moving averages also fell below 100-day moving averages. Bond yields and prices have an inverse relationship.

Looking at the credit markets, high yield spreads widened off extremely tight levels, rising by the most since last September to levels last seen in April. Broad high-yield and investment-grade spreads remain more than 40% below their long-term averages. Despite widening credit spreads, credit segments produced positive total returns last month led by the more duration-sensitive investment-grade bonds.

In the current market environment, with rates still well below their historic levels, Bartolini warned that income generation remains challenging for bond investors.

Nevertheless, Kevin Nicholson, Global Fixed Income Co-CIO at RiverFront Investment Group, believed investors can still implement a fixed income strategy to adapt to current market conditions. One such strategy might be a barbell strategy with corporates on the front end of the yield curve with investment grade debt on the shorter horizon and high-yield corporates on the longer horizon portfolios. Additionally, Treasuries can be used on the long end of the yield curve.

Nicholson even argued that investors can supplement portfolio income with a covered call strategy to collect premiums by writing out of the money calls.

RiverFront Investments Group offers a suite of RiverShares Model Portfolios that are comprised solely of RiverFront sub-advised ETFs. These models are constructed based on investor time horizons and risk tolerances, according to RiverFront.

For example, the actively managed RiverFront Dynamic Core Income ETF (NYSEArca: RFCI) and RiverFront Dynamic Unconstrained Income ETF (NYSEArca: RFUN) both include global fixed income securities and are constructed through a two-step process. First of all, the fund manager selects strategic allocations among different fixed income assets classes, with one objective being to construct an allocation that is designed to balance the probability of upside returns with downside risks for investors within a five-year timeframe. Secondly, the portfolio is tactically adjusted as market conditions warrant and determines security selection within asset classes to maximize potential returns over time.

RFCI is prohibited from investing more than 15% in high-yield and more than 10% in securities denominated in foreign currencies or emerging market debt. The average duration of the fund is expected to be between two and eight years, under normal conditions.

RFUN may allocate to various fixed income asset classes, such as high-yield, mortgage backed securities and corporate debt, without constraint, but it is limited to no more than 50% allocation to securities denominated in foreign currencies and no more than 50% allocation in emerging market debt. The average duration of the fund is expected to be between two and 10 years, under normal conditions.

Additionally, the RiverFront Strategic Income Fund (RIGS) utilizes various investment strategies in a broad array of fixed income sectors.

Financial advisors who are interested in learning more about innovative fixed income strategies can watch the webcast here on demand.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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