Market outlooks and expectations continue to evolve in the second half on changing economic data, risks, and investor sentiment. Albert Giroux, portfolio specialist, broad markets fixed income at Morgan Stanley Investment Management, discussed what the team sees looking ahead for bond markets in a recent video.
‘Significant’ Rate Cuts on Horizon
Growing economic data in support of easing across a number of inflationary vectors resulted in rising market forecasts for upward of three interest rate cuts this year, according to the CMEGroup FedWatch Tool.
“Expectations are growing for significant rate cutting by the U.S. Federal Reserve,” Giroux noted. Federal Chair Jerome Powell’s recent Jackson Hole speech only lends credence to investor hopes of rate cuts in September and beyond.
Beyond the three rate cuts expected this year, markets also currently price in a rate cut every quarter next year. “Against the backdrop, we see the scope for continued positive performance for bonds,” explained Giroux. However, “this will depend on the magnitude of monetary easing, which itself will remain data dependent.”
Role of Politics & Benefits of Short-Term Duration
The U.S. election will remain front and center for many investors as November inches ever closer. This campaign season also continues to deliver unexpected twists, creating evolving outlooks and expectations. “The dramatic events, tight polling, and divergent policy platforms suggests close monitoring of the upcoming U.S. election is warranted,” cautioned Giroux.
It’s the type of environment that leaves high quality bonds well-positioned, according to MSIM’s Broad Markets Fixed Income team. Within these bonds, investors would do well to consider short-duration securitized credit sectors. This includes residential mortgage-backed securities (RMBS) as well as asset-backed securities (ABS).
“Not only do they offer yields that we see as attractive, but short-duration sectors have defensive qualities that are often sought-after during times of higher volatility,” Giroux elaborated.
This defensive capability will likely prove attractive in the coming months as short-term volatility risks rise ahead of the election.
Fixed Income Investing With MSIM
Income investors looking to increase their short-duration exposures should consider the Eaton Vance lineup of ETFs.
A mutual fund conversion, the Eaton Vance Short Duration Income ETF (EVSD) seeks elevated returns throughout a three- to five-year market cycle. The fund invests across sectors in corporate bonds, U.S. government bonds, and mortgage and asset-backed securities. The Broad Markets Fixed Income team seeks to keep the fund’s duration to three years or less, and employs a top-down and bottom-up investment strategy. EVSD carries an expense ratio of 0.24%.
Another recent mutual fund conversion, the Eaton Vance Short Duration Municipal Income ETF (EVSM) seeks current income that is exempt from regular federal income tax. The ETF invests across the municipal bond sectors, credit tiers, and states. Eaton Vance brings decades of municipal bond investing experience to bear when actively managing the fund. EVSM seeks to offer a duration of less than three years with an expense ratio of 0.19%.
For investors looking to add ultra-short duration exposure, the Eaton Vance Ultra-Short Income ETF (EVSB) seeks to maximize income potential while still preserving capital. It invests in investment-grade, short-term fixed, variable, and floating-rate bonds that generate income. The Broad Markets Fixed Income team seeks to keep the fund’s duration to one year or less and selects securities across sectors. EVSB has an expense ratio of 0.17%.
For more news, information, and analysis visit The ETF Yield Channel.