View all WisdomTree insights in the Income Strategies category.
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. 
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Well, here we are. The “leave” Brexit vote has become a reality and the global markets essentially responded as expected. While the catalyst this time around is perhaps different, it does seem as if we have been down this road before. Kevin Flanagan cautions investors to not get caught up in the headlines of the day but, rather, focus on what comes next once emotions have cooled. 
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2016 has been a volatile year for many asset classes. During times like these, it is not unusual for safe-haven assets, such as U.S. investment-grade fixed income, to experience outsized total returns. However, this rally is not just about a risk-off scenario leading to a run-up in bond prices.
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On March 29, 2016, I attended a speech given at the Economic Club of New York by Federal Reserve (Fed) chair Janet Yellen, entitled “The Outlook, Uncertainty, and Monetary Policy.” For most Fed watchers, the key takeaway was that the pace of any interest rate hikes would likely be very gradual, given the current uncertainty in the global economy.
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Over the last several months, we have spent a great deal of time attempting to understand what drives performance and volatility of the Barclays U.S. Aggregate Index. WisdomTree sought to create an approach that started with the same investable universe but ultimately aimed to enhance the yield of the strategy. 
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With U.S. equity markets down , many investors are being confronted with difficult questions surrounding their asset allocation decisions. While exposure to equities may be causing pain, bond markets have not provided the typical ballast to performance that we’ve seen in previous sell-offs. 
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As we’ve highlighted over the last several weeks, investors should be taking a closer look at their bond portfolios and determining if allocations to the Barclays U.S. Aggregate Index (Agg) are consistent with their investment objectives. In our view, while the Agg provides a time-tested barometer for fixed income performance, as an investment strategy, the approach is suboptimal.
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