The June issue of our Bond Fund Intelligence, which will be sent to subscribers Friday a.m., features the articles, "NY Fed Examines Credit Cycle & Corporate Bond Returns," which reviews a recent report from the Federal Reserve Bank of New York; and "Ultra-Short Bond Funds Becoming Popular Again," which excerpts from several recent articles on the resurgence of ultra-short bond funds. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns rose again in May while yields jumped. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
BFI's lead article states, "The Federal Reserve Bank of New York published, 'The Global Credit Cycle in Corporate Bond Returns.' The paper says, 'The global corporate nonfinancial bond market is both a large investment asset class and a vital source of funding for nonfinancial firms. With $19 trillion outstanding at the end of 2024, a broad portfolio of corporate bonds would be expected to be well diversified. Yet, in 37 percent of months between 1998 and 2024, more than 80 percent of bonds in the ICE Global Bond Indices—a portfolio with over 10,000 constituents spanning diverse industries, credit ratings, and regions—moved in the same direction, suggesting a large degree of synchronization. In this post, we introduce the global credit factor, which proxies for the global price of risk in international corporate bond markets. The global credit factor creates a global credit cycle in bond risk premia and generates predictable co-movement in bond prices.'"
It continues, "The paper asks, 'Is there a global credit cycle in global corporate bond returns?' They reply, 'To answer that question, we construct a proxy for a global component of credit risk pricing, which we dub the global credit factor. Our approach, described in detail in our Staff Report, is motivated by the literature on intermediary asset pricing, which argues that risk prices reflect balance sheet constraints of financial intermediaries. Because the tightness of balance sheet constraints fluctuates over time, so do risk prices.'"
Our "Ultra-Short" article states, "The Wall Street Journal wrote recently about, 'Why Ultra-Short Bond Funds Are Ultra Popular Right Now.' They explain, 'So-called ultra-short bond funds, which typically hold debt that matures in less than a year, have taken in more money than any other Morningstar fixed-income ETF category this year, and posted their largest monthly inflow ever in March.'"
It says, "The article continues, 'Short-term funds are offering close to 4% yields and relatively little price volatility—a setup that has made them hot since the Federal Reserve began lifting benchmark interest rates in 2022. Ultra-short funds are comparable to money-market funds but can invest in a wider range of debt, offering more yield but less stability.'"
Our first News brief, "Returns Up Again, Yields Jump in May," states, "Bond fund returns were higher again in May while yields jumped. Our BFI Total Index rose 0.39% over 1-month and rose 5.71% over 12 months. (Money funds rose 3.83% over 1-year as measured by our Crane 100 Index.) The BFI 100 increased 0.37% in May and rose 5.61% over 12 mos. Our BFI Conservative Ultra-Short Index was up 0.32% over 1-month and 4.38% for 1-year; Ultra-Shorts rose 0.36% and 4.50%. Short-Term rose 0.20% and 4.38%, and Intm-Term increased 0.31% in May and rose 5.69% over 12 mos. BFI's Long-Term Index was up 0.56% and 5.96%. High Yield rose 0.51% in May and 6.98% over 12 mos."
A second News brief states: "'Vanguard Expands High-Yield Offering with Vanguard U.S. High-Yield Corporate Bond Index ETF,' says a press release. It tells us, 'Vanguard ... announced the launch of the Vanguard U.S. High-Yield Corporate Bond Index ETF (VCHY), expanding its fixed income lineup with index-based exposure to U.S. dollar-denominated high-yield corporate bonds. The ETF is managed by Vanguard Capital Management's Fixed Income Group.' They quote Sara Devereux, 'The high-yield market is both sizable and growing in importance within fixed income portfolios, yet much of today’s exposure sits in higher-cost structures. VCHY expands Vanguard's ETF lineup with a low-cost, index-based approach to U.S dollar-denominated High-yield corporate bonds, designed to deliver broad, rules-based exposure with a focus on liquidity and precision. It provides investors with a clear and efficient way to help access high yield within a diversified portfolio.'"
Another brief says, "Federated Hermes' Karen Manna writes 'Bond Markets Pinpoint Conflicting Dynamics.' The brief tells us, 'In discussions with investors, some frustration with fixed income remains front and center. The drawdown in 2022 fundamentally altered perceptions of the asset class, and even though markets recovered quickly, that experience continues to anchor positioning today. What has changed is the regime: a structurally higher rate environment and persistent inflation uncertainty challenge the assumption that simply extending duration will deliver returns <b:>`_…. [W]e see a `more compelling risk-reward in a tactical posture focused on the front end, where investors can capture attractive income while maintaining flexibility in an evolving policy and macro backdrop. In a market characterized by tight spreads, elevated uncertainty, and limited margin for error, the focus remains clear: lean into what is knowable, maintain valuation discipline, and position portfolios to capture income while remaining flexible as the macro outlook evolves.'"
A BFI sidebar, "Hoag Tells Barron's 'Lean In'," states, "The latest issue of Barron's interviews David Hoag, portfolio co-manager of Capital Group's Bond Fund of America in a piece titled, 'Why This $101 Billion Bond Fund Manager Is Leaning Into the Chaos.' They write, 'Higher yields are spooking bond investors. Your best bet may be to lean in, according to the co-manager of one of the market's largest bond funds.... On Wednesday, the yield on 10-year Treasury notes stood at 4.49%, up from less than 4% at the start of the conflict.'"
Finally, another sidebar, "Vanguard on Tech, AI," states, "Vanguard also wrote recently on 'The Tech Pillars Shaping Fixed Income's Future.' They explain, 'It is an exciting time for technology in fixed income. Compared with the equity market, the bond market is much larger and more opaque, encompassing millions of individual securities that trade over the counter rather than on centralized exchanges. This inherent complexity has historically made it more challenging to navigate, less transparent, and ripe for the application of tech by sophisticated investors.'"
