Advisors See Best Opportunity for Bonds Since Financial Crisis: Survey
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What’s to Worry About?
Inflation may be at about half of its peak, but at roughly 5%, it remains generationally high and more than double the Federal Reserve’s 2% target rate, leaving the possibility of additional rate hikes, in the survey sponsors’ opinion.
Many advisors in the survey expressed less concern about credit and default risks since companies appear to be actively preparing for a recession by strengthening their balance sheets and streamlining operations. So, what keeps them up at night?
Two-thirds worry that high inflation could linger longer than expected, and half are concerned that this could push rates higher than anticipated, with a third saying rates could stay higher for longer than expected.
Other common fixed income concerns trail well behind, including credit spreads, default risk, liquidity and currency risk.
According to Natixis IM and Loomis Sayles, some observers have been surprised at how little influence Wall Street appears to have had on the debate in Washington over a possible debt ceiling showdown between the Republican-led House and the Biden administration.
The lack of concern is borne out in the survey in which just 15% of advisors said they are losing sleep over the effect that the showdown could have on bonds.
Looking Ahead
With the rates on 10-year Treasurys hovering around 3.5% and more hikes likely, 31% of advisors project rates between 3.5% and 3.99%, and 28% project rates between 4% and 4.49% — both still far short of the historical average of 5.89%. This means that 58% of advisors think rates will remain range-bound, likely reducing concerns about potential duration risk.
Given uncertainties about inflation and rates, 77% of advisors expect active investments to outperform passive ones, and 66% believe traditional fixed income will outperform alternatives. Six in 10 also project that investment-grade bonds will outperform high-yield bonds.
Advisors continue to deploy more tried-and-true investment structures, according to the survey, with 87% using bond funds and 73% investing in passive ETFs. However, consistent with their view that active will outperform passive, 58% also are finding a place for active ETFs in their portfolios, and 66% said active ETFs are an increasingly attractive option for fixed income.
Bringing Clients on Board
Dave Goodsell, executive director of the Natixis Center for Investor Insight, said in the statement that the biggest challenge for many advisors may not be when to increase their exposure to bonds but how to bring clients along in the decision.
“After a tumultuous year for fixed income investors in 2022, they will need to help clients overcome post-traumatic stress,” Goodsell said. “They need to re-educate clients on how rates and bonds work and show them why fixed income allocations are essential to a portfolio that can meet income, return and diversification goals.”
These are the biggest challenges advisors identified when speaking to clients about bond funds:
Many clients think bonds should never lose money: 59%
People felt burned by bonds in 2022: 48%
Inflation makes people leery of locking in interest rates: 38%
Some clients believe that fixed income is for only “old people”: 26%
As a result, the survey found that advisors need an expanded mix of investment structures to respond to their clients’ increasing appetite for customized fixed income solutions. Forty-nine percent of advisors said they would like to know more about building fixed income portfolios to meet high client expectations.
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