Joanna Gallegos: “Fixed Income Should Perform Better in 2023”

BondBloxx Investment Management was launched in October of 2021 by ETF industry leaders to provide precision ETF exposure for fixed income investors. Since February 2022, the firm has launched 19 fixed income ETFs.

At Exchange, BondBloxx co-founder Joanna Gallegos spoke with VettaFi about how and why fixed income markets are different in 2023 than they were in 2022, where we may be in the Federal Reserve’s rate hike cycle, and why fixed income should fare better this year than last.

This interview has been edited for length and clarity.

VettaFi: 2022 was a historically bad year for fixed income, but now that we’re in 2023, things seem to be changing. What do you think is driving that?

Joanna Gallegos: One of the problems with fixed income markets last year was that rates went from zero to 425 basis points. So, as you were battling price declines in fixed income, you didn’t have a lot of yield to cushion your return on the way down. Now in 2023, we’re benefiting from the market resetting. Yields are at 15-year highs and credit yields have actually doubled across the board. IG is at 5%, and it hasn’t been at 5% for 13 years. You’re starting at a very different position, so we expect that fixed income should perform better in 2023.

VettaFi: Do you think we’re coming to the end of the Fed’s rate hike cycle?

Gallegos: In 2022, the Fed was playing a very significant game of catch-up to battle inflation. They had to move very quickly, and the rate increases were pretty steep. The expectation in 2023 is that the Fed is coming to the end of its rate-raising cycle and that we’re going to get to a terminal rate for a particular period of time.

Although there has been three months of economic data that tells you that inflation is coming down, that the tail risks of 2023 are lessening, and that maybe the recession won’t be as deep as people were concerned about, we have something like [the latest]  jobs report that just completely throws off everybody trying to understand how these different pieces of information relate to Fed action.

The simplest thing we know is that the Fed has a ton of conviction. They have a goal of getting [inflation] down to 2%, and they’ll do what it takes to do that.

VettaFi: What are your clients looking for as we enter this new year and this new, very different economic environment?

Gallegos: Our clients are looking for more granular exposure in 2023. We’re hearing a lot from institutional clients that want to trade on different risk characteristics over the next few cycles. So, as rates come down, they want to set up products that allow them to pivot their portfolios to different exposures. As rates have gone up and have stabilized, they’re looking to get into part of an asset class like high yield to take advantage of things developing in different parts of high yield.

So, being able to be nimble and agile with their portfolios is what we hear from clients, because you can expect more volatility and a lot of differentiation between different parts within an asset class. They want more exposure. You just can’t count on the way fixed income markets were structured and performing in the last 10 years. These next two to five years are just not going to be about that.

VettaFi: Speaking of the future, are there any new products in the works at BondBloxx that you can share with us?

Gallegos: We’re still on our journey. We intend to launch products across all the asset classes in fixed income. We’re not done with offering different products across credit.

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