3 for ’21: Key fixed income themes for the New Year

Dec 28th, 2020 | By | Category: Fixed Income

By Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree.

“3 for 21” would not be an ideal stat in the sporting world. But for fixed income investors, we feel three will be an important number in 2021, as, in our opinion, it represents the number of key themes to focus on in the new year.

Here’s a brief synopsis of these themes and how WisdomTree can help provide solutions for them in the fixed income universe.

  1. Quality and Income

With interest rates at historical lows, investors will be tasked with looking for income without moving too far out in duration or, perhaps more importantly, sacrificing credit quality.

The WisdomTree Yield Enhanced US Aggregate Bond Fund (AGGY US) offers investors just such a strategy. This fund re-weights the sectors of the Bloomberg Barclays US Aggregate Bond Index utilizing important guardrails to enhance yield while maintaining a familiar risk profile. This approach focuses on the investment-grade aspect while keeping away from high yield, emerging market debt, or leverage, a desirable trait for core fixed income.

The WisdomTree US High Yield Corporate Bond Fund (WFHY US) offers investors a quality screen while tilting for income. By focusing on only public issuers and their attendant balance sheets, we were able to identify “cash flow” as a vital attribute. We eliminate those issuers with negative cash flow, helping to address credit quality concerns and potentially mitigating default risk.

  1. Reflation Trade

While we expect the Federal Reserve to keep rates at or near zero, intermediate to longer-dated Treasury yields could still grind higher, with the yield curve steepening due to unprecedented monetary and fiscal stimulus. Key factors such as pent-up demand and optimism surrounding the vaccine rollout could push inflation expectations and inflation headline readings higher in 2021.

The WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD US) offers investors a way to provide income while mitigating interest rate risk. This strategy utilizes our quality-screened high-yield approach while “zeroing” out duration. Thus, investors can address both income needs and rate concerns in just one Fund.

The WisdomTree Floating Rate Treasury Fund (USFR US) offers investors a rate-hedge strategy that focuses only on US government securities and doesn’t include any credit issuers, unlike most, if not all, other existing floating rate options. This approach also offers an attractive alternative to inflation-protected securities without the longer duration they typically include.

  1. Emerging Markets

With the global economic setting expected to improve after Q1 2021, accommodative central bank policies in both the developed and emerging market worlds, and the potential for a softer US dollar setting, we anticipate a favorable setting for local currency sovereign emerging market debt.

The WisdomTree Emerging Markets Local Debt Fund (ELD US) offers investors an approach to take advantage of the potential opportunities in the local currency EMD space while utilizing a process of continuous risk management. Key factors in the risk-monitoring process include growth/inflation indicators, debt service capability, and short-term liquidity factors, enabling countries that exhibit fiscal/monetary discipline to receive an increase in their respective allocation.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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