Despite the Federal Reserve’s four interest rate increases in 2018, investors remained fond of fixed income exchange traded funds (ETFs). Overall, US-listed ETFs hauled in $313 billion in new capital, good for the second-best annual tally ever behind only 2017.
Bond ETFs added $97 billion in new assets, or 31 percent of last year’s total ETF inflows, according to CFRA Research. Investors continue warming to actively managed fixed income ETFs. Last year, active bond ETFs hauled in $21 billion in new money, equal to the total inflows to active bond ETFs in the previous three years combined, notes CFRA.
All that while the venerable Bloomberg Barclays US Aggregate Bond Index was flat last year. Speaking of actively managed bond ETFs and the Bloomberg Barclays US Aggregate Bond Index, the newly minted (and actively managed) JPMorgan U.S. Aggregate Bond ETF (JAGG) aims to have a similar risk profile to the “Agg” while providing a credible alternative to traditional, passive aggregate bond funds.
The JPMorgan U.S. Aggregate Bond ETF (JAGG) can include corporate bonds, mortgage-backed securities, Treasuries and other agency debt, among other fixed income assets.
In 2018, ex-US equity markets spent much of the year slumping and were joined by U.S. counterparts late in the year. Those losses coupled with some signs of slowing global economic output indicate that, at least for now, the world does not want to see 3 percent yields on 10-year Treasuries.
“The world is now incapable of shouldering a 10-year Treasury yield above 3%,” said Moody’s Investors Service. “A remedial decline by the U.S.’ benchmark interest rates will be critical to rejuvenating global business activity and stabilizing financial markets. Otherwise, the corporate earnings outlook might deteriorate by enough to sink the market value of U.S. common stock by another 20% and swell the now 552 basis point high yield bond spread to 800 bp.”
Benchmark interest rates in major global economies, particularly the U.S., can encourage or discourage economic activity. Bolstering the case for lower Treasury yields in 2019 are the dismal 2018 performances turned in by crude oil and industrial metals.
“Recent year-to-year price setbacks of 25% for WTI crude oil and 16% for the base metals price index reflect a meaningful deceleration of global activity that, similar to 1998, is likely to be remedied by lower benchmark interest rates in the U.S.,” according to Moody’s.
Courtesy: Moody’s Investors Service
Currently, Fed funds futures indicate a zero percent chance of a Fed rate hike in 2019. While the percentage is still low, the Eurodollar market indicates a 7 percent chance the Fed actually lowers rates in March, a percentage that has been moving higher in recent weeks.
Calling On Corporates
With much ado about the state of the domestic corporate bond market heading into 2019, particularly the fate of BBB-rated bonds, the JPMorgan U.S. Aggregate Bond ETF (JAGG) adds layers of protection for investors mulling corporate exposure. JAGG employs a multi-factor screening process to corporate bonds to identify issues with favorable momentum, quality and value traits.
The multi-factor screening process used by JAGG’s managers could be especially beneficial to investors at a time when investment-grade corporate bond issuance is sagging, due in large part to last year’s higher yields.
“In 2018, IG bonds offered by U.S. companies sank by 22.5% annually to $851 billion for the category’s worst year since 2013’s $771 billion,” said Moody’s. “The slide by 2018’s IG issuance included a 35.5% drop by high-grade offerings to $253 billion–the lowest since 1998’s $253 billion–and a 15.3% decline by medium-grade issuance to $598 billion–the lowest since 2014’s $549 billion.”
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