The Federal Reserve remains in a holding pattern over interest rates after the latest FOMC meeting. Bond investors now balance the potential risks and rewards of taking on longer-duration exposures in the current environment.
Short-duration bonds remain a popular haven for many investors while the yield curve stays inverted as rate risk lingers. However, increasingly more advisors and investors look to the potential of locking in elevated yields ahead of eventual rate cuts.
Markets will likely diminish in the near term but remain stable according to Jim Caron, CIO of the Portfolio Solutions Group at Morgan Stanley Investment Management.
“I believe we are entering into a long-form correction,” Caron, said in a May outlook. “We should expect range-bound markets for both equity prices and bond yields.”
It’s the type of environment that favors neutral portfolio positioning and creates pockets of opportunity. Within bonds, this is arguably more pronounced, given general portfolios are underweight to longer-duration exposures.
“We think the rates reset has created a good entry point for bonds,” explained Ewa Turek, executive director of the Capital Markets Group of MSIM. “Our base case remains for a soft landing which implies that default risks may remain contained.”
Look to EVTR When Investing in Bonds
In a dynamic rate environment, actively managed bond strategies continue to prove popular with investors. The recently launched Eaton Vance Total Return Bond ETF (EVTR) is actively managed and is a recent mutual fund conversion.
The fund makes a good entry point for those investors looking to move further out on the yield curve with the benefit of active management. EVTR seeks to generate higher-than-average fixed income returns over three to five years. The fund utilizes a multi-sector strategy that includes both top-down and bottom-up analysis.
EVTR invests primarily in investment-grade bonds that include Treasuries, corporate, municipal, mortgage-backed, as well as asset-backed securities. It also invests in high yield and may invest in derivatives to achieve its goal as well as non-dollar denominated securities.
Investment grade credit (30.28% weight), mortgage-backed securities (27.86%), and commercial mortgage-backed securities (14.92%) made up the largest sector allocations as of 03/31/2024.
EVTR seeks to maintain an average weighted maturity of five-10 years. The fund currently offers an effective duration of 5.98 years with a yield to maturity of 6.62% as of 05/03/2024.
EVTR carries an expense ratio of 0.32%.
See also: "Morgan Stanley Converts 2 Mutual Funds Into Active ETFs"
For more news, information, and analysis, visit The ETF Yield Channel.
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