The emergence of what is called “smart beta” in the equity arena has certainly garnered its share of headlines, but this movement in fixed income is just gaining momentum and promises to be the next step in the evolution of solutions for bond market investing.
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Despite the Fed poised to increase interest rates two additional times this year, nominal interest rates are lower than they were to start the year at maturities of five years or greater. In this article, we highlight the likely driver of what we believe will prove to be a temporary decline in rates.
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Several years ago, WisdomTree helped Barclays develop a strategy that relied on the same investable universe as the Bloomberg Barclays U.S. Aggregate Index (Agg) but sought to boost yield in a risk-efficient way. In version 2.0, we’ve taken a similar framework, but limited exposures to bonds with one to five years to maturity, resulting in a strategy with significantly less interest rate risk.
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When examining the appropriate course for fixed income strategies thus far in 2017, we appear to be staying on course. The overall premise for fixed income investing has essentially been playing out according to our base case: blending a strategic core approach with a complementary solution for the potential of higher rates later in the year.
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Setting aside what a Trump victory could mean for the social morale of the country, his presidency may have some positive economic effects, namely through tax cuts and infrastructure. While infrastructure spending is a commonality between both candidates’ policy agendas, Trump’s comes paired with tax cuts, which could act as a “steroid” to the markets and, in turn, could extend the bull market and potentially take it to new highs.
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We’re now past the one-month post-Brexit vote mark, and the dust does appear to be settling in the fixed income markets. The initial knee-jerk responses in both the interest- and credit-sensitive arenas have given way to more of a focus of what market conditions may be like during the second half of this year and into 2017.
