How fixed income funds are changing amid volatility, trepidation

How fixed income funds are changing, and the case for fixed income now

Speaking for her own team at Dynamic, Devli says that they have worked to launch more ETFs that offer managers greater flexibility in duration. New fixed income funds being launched, she says, will empower active managers to take duration exposure to zero if they feel that markets are headed towards another 2022 scenario of sustained positive correlation between fixed income and equities. Other fixed income products, she says, have been able to go to half of the predominant index duration, a function that was designed in the wake of the financial crisis when index duration was at about half of its current state.

“We are hearing investors loud and clear on products that they want that can protect them from another 2022 event,” Devli says.

With those protections baked in, Devli says there is a serious and growing case for bond allocations. That begins, she says, with the yields that investors can now get from textbook ‘risk-free’ investments. While price volatility in assets like 10-year US treasury bonds is higher than it once was, the 10-year bond remains one of the most important assets in the world, backed by the global reserve currency. That security, with a yield at over five per cent, is something that she believes advisors need to look at seriously.

Devli notes, too, that while inflation carries risk of positive correlation for bonds and equities, growth scares imply a negative correlation. While economic growth in the US has been robust lately, it is somewhat narrowly driven with AI capital expenditure as a significant force behind it. The recent talk of an AI slowdown by some of the most significant leaders in the space, Devli says, could imply a slowdown in the AI infrastructure buildout, which could be a growth shock for the US and global economies, offering upside for bond investors. For advisors, especially those serving retired clients, the combination of yield and growth insurance should be enough to prompt a reconsideration of bonds again.

“For an investment advisor with clients going into retirement, who might not own bonds right now, this is a way to bring down the growth scare probability in the overall portfolio,” Devli says. “And a way to do that while still gaining income.”