Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
People looking at charts on an iPad

Portfolio > Economy & Markets > Fixed Income

Advisors See Best Opportunity for Bonds Since Financial Crisis: Survey

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Bonds are back, say nearly 90% of financial advisors in a new survey.
  • According to the survey, many advisors see fixed income as a way to mitigate portfolio risk by enhancing diversification rather than a way to generate income for clients.
  • The biggest challenge for many advisors will be re-educating clients on how rates and bonds work.

Nine in 10 financial advisors in a survey released Wednesday agree that bond yields are back, and say this is the best yield opportunity they have seen in many years. Indeed, more than two-thirds consider this the best return opportunity since before the global financial crisis.

CoreData Research conducted the survey by Natixis Investment Managers and Loomis Sayles in February and March among 350 respondents in the U.S., split equally among independent broker-dealers, wirehouse advisors and RIAs.

Along with their strong convictions about the resurgence in yield, inflation remains the top risk concern for 89% of advisors surveyed, followed by central bank policy uncertainty, the main concern of 56%.

Sixty-nine percent of respondents agreed that lower inflation would make bonds more attractive, yet 60% did not think that inflation or interest rates have peaked yet. With the consensus split in their views on duration, 58% of advisors said they are uncomfortable taking on duration risk.

Fifty-eight percent of survey participants expect short duration to outperform this year, and 71% of those who share this outlook also tend to agree that inflation has not yet peaked. Of the 42% who are betting on longer durations, 55% think inflation already has peaked.

After seeing bonds and stocks both lose ground in 2022, 69% of advisors believe that bonds have not yet fully decoupled from equities. A third are worried about missing the right entry point into the bond markets.

In the current environment, 80% of respondents said it is important to work with an experienced active bond manager, and 71% said active management makes more sense than passive for fixed income.

“Interest rates at or near all-time lows have held bonds to historically low yields, forcing many investors to go further afield not only for income but also for risk management,” Richard Raczkowski, portfolio manager and co-head of the Loomis Sayles relative return team, said in a statement.

“After the past year’s rate hikes, 80% of advisors look to bonds to produce income, and three in four say that bonds once again are ballast in portfolios during times of volatility,” he said.

Beyond Yield

Although many advisors see fixed income as a way to generate income for clients, 85% are even likelier to see it as a way to mitigate portfolio risk by enhancing diversification. Similarly, two-thirds of advisors see fixed income as a way to minimize risk of loss.

Despite the renewed focus on fixed income’s income-generating and risk-management properties, the survey results showed that few advisors are looking for the asset class to fulfill other traditional roles associated with it.

Even though they see this as the best return opportunity for bonds in 15 years, only 47% of advisors are looking to pursue total return with their fixed income investments.

And given their avoidance of the duration risk inherent in government bonds and focus on credit risk, just 45% are looking for tax efficiency out of fixed income holdings — another time-honored function of bonds, Natixis IM and Loomis Sayles noted.

What’s to Worry About?

Inflation may be at about half of its peak, but at roughly 5%, it remains generationally high and more than double the Federal Reserve’s 2% target rate, leaving the possibility of additional rate hikes, in the survey sponsors’ opinion.

Many advisors in the survey expressed less concern about credit and default risks since companies appear to be actively preparing for a recession by strengthening their balance sheets and streamlining operations. So, what keeps them up at night?

Two-thirds worry that high inflation could linger longer than expected, and half are concerned that this could push rates higher than anticipated, with a third saying rates could stay higher for longer than expected.

Other common fixed income concerns trail well behind, including credit spreads, default risk, liquidity and currency risk.

According to Natixis IM and Loomis Sayles, some observers have been surprised at how little influence Wall Street appears to have had on the debate in Washington over a possible debt ceiling showdown between the Republican-led House and the Biden administration.

The lack of concern is borne out in the survey in which just 15% of advisors said they are losing sleep over the effect that the showdown could have on bonds.

Looking Ahead

With the rates on 10-year Treasurys hovering around 3.5% and more hikes likely, 31% of advisors project rates between 3.5% and 3.99%, and 28% project rates between 4% and 4.49% — both still far short of the historical average of 5.89%. This means that 58% of advisors think rates will remain range-bound, likely reducing concerns about potential duration risk.

Given uncertainties about inflation and rates, 77% of advisors expect active investments to outperform passive ones, and 66% believe traditional fixed income will outperform alternatives. Six in 10 also project that investment-grade bonds will outperform high-yield bonds.

Advisors continue to deploy more tried-and-true investment structures, according to the survey, with 87% using bond funds and 73% investing in passive ETFs. However, consistent with their view that active will outperform passive, 58% also are finding a place for active ETFs in their portfolios, and 66% said active ETFs are an increasingly attractive option for fixed income.

Bringing Clients on Board

Dave Goodsell, executive director of the Natixis Center for Investor Insight, said in the statement that the biggest challenge for many advisors may not be when to increase their exposure to bonds but how to bring clients along in the decision.

“After a tumultuous year for fixed income investors in 2022, they will need to help clients overcome post-traumatic stress,” Goodsell said. “They need to re-educate clients on how rates and bonds work and show them why fixed income allocations are essential to a portfolio that can meet income, return and diversification goals.”

These are the biggest challenges advisors identified when speaking to clients about bond funds:

  • Many clients think bonds should never lose money: 59%
  • People felt burned by bonds in 2022: 48%
  • Inflation makes people leery of locking in interest rates: 38%
  • Some clients believe that fixed income is for only “old people”: 26%

As a result, the survey found that advisors need an expanded mix of investment structures to respond to their clients’ increasing appetite for customized fixed income solutions. Forty-nine percent of advisors said they would like to know more about building fixed income portfolios to meet high client expectations.

(Image: Shutterstock)


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.