Advisors Leave Bonds Alone Amid Debt Ceiling Fight

There may be nothing more confusing to advisors than the bond market over the past 12 months. And with the day the U.S. government can no longer pay its bills rapidly approaching, things aren’t getting any clearer. So, with no progress being made in debt ceiling talks, advisors are using bonds less as a strategic allocation and more as a parking spot.

Allocation Approaches Mid-Debt Ceiling Fight

Attendees of the “VettaFi’s Future of Finance: The Real Bond Market” webcast on May 24 were asked how they’re approaching their fixed income allocations amid the debt ceiling fight. More than half (53%) said are making no changes to their fixed income allocations.

Additionally, the poll also showed that 23% of respondents are moving their short-term bond exposure to greater than 3 months. Meanwhile, 13% are buying short-duration, currently higher yielding bonds. The remaining 11% of respondents said they’re loading up on duration in anticipation of rate hikes.

The webcast, moderated by VettaFi’s financial futurist Dave Nadig, also asked attendees the most important factor when selecting a bond manager. Active performance topped the list of priorities, with 40% of respondents citing this as their biggest determining factor. The second-most popular factor among advisors was knowing how to use them in a full portfolio (30%).

When asked if they use model portfolios or TAMP programs, 75% of advisors said they use in-house models or manage client portfolios individually. Only 4% use a full TAMP.

See more: “All Treasuries, Maybe Some Gold’: 3EDGE’s Biegeleisen On Fixed Income

Harbingers of an Economic Downturn

“We’re not seeing the conditions for economic growth,” said 3EDGE Asset Management’s deputy CIO Eric Biegeleisen during the webcast. He cited commercial bank tightening, monetary tightening, compressed profit margins, and peak employment as “harbingers of an economic downturn.”

Biegeleisen explained that 3EDGE is very conservative in its total allocation, making sure its clients aren’t directly holding any actual Treasury bills that default. That means targeting ETFs that aren’t maturing in the next several months. The idea behind this, according to Biegeleisen, is to get 3EDGE and its clients outside that debt ceiling window.

“Regardless of the debt ceiling fight outcome, there’s going to be risk,” he added. “We may have a period of doldrums for years and more pain to come.”

For more news, information, and analysis, visit the Fixed Income Channel.