Uncertainty in U.S. equities is pushing many advisors and investors to increase their fixed income allocations. However, which fixed income strategies offer the most attractive risk/reward profile?
During VettaFi’s recent Income Investment Strategy Symposium, VettaFi Head of Research Todd Rosenbluth hosted a panel on this very topic. Joining him to evaluate the fixed income space was Kevin Flanagan, head of fixed income strategy at WisdomTree, along with Brian Leach, EVP and Head of ETF Product and Credit Product Strategy at Pimco.
Rate Expectations
To get the ball rolling, Rosenbluth first asked the panelists how aggressive they expect the Fed to be with rate cuts across the next six months. Flanagan began his response by noting that interest rates are starting to return to normal, pre-COVID levels.
He added that the new generation of investors still need to get used to 4%-4.5% Treasury yields. In terms of Fed action, however, Flanagan assessed that the committee is going to take things slow with rate cuts.
“From the Fed perspective, I think Powell pretty much summed it up,” Flanagan added. “This is not the time to be preemptive. You can agree or you can disagree with the chairman, but it seems to be pretty much a majority rule amongst the voting members that they’re going to wait and let the data come to them.”
Mindful of Volatility
From there, Rosenbluth highlighted a VettaFi poll of the symposium’s audience, which showed that municipal bonds, investment-grade corporates, and U.S. Treasuries are some of the most appealing fixed income investment styles at the moment. Rosenbluth then turned to the panelists and asked them to weigh in on these results.
Leach noted that he agreed with the audience’s responses. Citing Flanagan’s interest rate outlook, Leach advised attendees to opt for a quality approach in lieu of chasing yield.
“There’s not a need to stretch for yield right now," he added. “Even during periods of volatility that we got in mid-April, high yield bonds cheapened a bit, but they weren’t incredibly cheap. I think it’s more about high-quality fixed income at the moment.”
Flanagan also noted that volatility is something that U.S. Treasury investors need to be wary of right now. In particular, he noted that 10-year Treasury yields have seen a significant trading range over the last 18 months.
“It’s not just the highs and the lows,” Flanagan noted. “It’s within those highs and lows, with that sawtooth pattern you continually see, that you’re not getting rewarded for being anything out past benchmark duration.”
However, Flanagan noted that Treasury floating rate notes are still benefiting from an inverted yield curve. As such, investors could use passive Treasury floating rate notes to lock in income without much volatility risk.
Blending Active With Passive
From there, Flanagan advised attendees to pair passive Treasury floating rate notes with active fixed income ETFs. In particular, Flanagan showcased a few of WisdomTree’s active muni ETF offerings as attractive investment approaches. This includes the WisdomTree Core Laddered Municipal Fund (WTMU), along with the WisdomTree High Income Laddered Municipal Fund (WTMY).
When paired with passive fixed income, Flanagan asserts that active laddered munis can help investors better manage duration risk, volatility, and security selection within the credit space. Especially when combined with attractive Treasury floating rate notes, a barbell approach could help investors find a path forward in this fixed income environment.
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