A Letter From Our CIO
Fixed Income Update
As we begin a new year, I’d like to take a moment to update our valued clients on 2021 activities and results. Though the pandemic continues to be a daily part of our lives, State Street Global Advisors’ has adapted to a new, hybrid work environment that supports individual and team flexibility while remaining focused on delivering the client outcomes we are known for.
Year-End Fixed Income Update
Amid rising US Treasury rates, 2021 proved to be a difficult year for the bond market, with only high yield posting positive returns for the year. Despite ongoing volatility in the Treasury space, where 10-year yields oscillated between a low of 0.91% and a high of 1.74%, our portfolio managers delivered the returns expected from an indexed strategy: 99.6% of our indexed funds performed within their pre-set tracking bands.1 Our portfolio managers and traders continuously adhere to our rigorous risk-control process, ensuring client cash flow requirements are met while also minimizing tracking risk (Figure 1).
Figure 1: 2021 Performance Results
| Bloomberg Barclays Composite/Index |
Composite Return (1Y) | Index Return (1Y) | Excess Return |
| US Aggregate | -1.56 | -1.54 | -0.02 |
| 1-3 US Credit | -0.13 | -0.17 | 0.04 |
| Intermediate US Credit | -0.9 | -1.03 | 0.13 |
| Long US Credit | -1.29 | -1.18 | -0.11 |
| 1-3 US Treasuries | -0.59 | -0.6 | 0.02 |
| 3-10 US Treasuries | -2.47 | -2.49 | 0.02 |
| Long US Treasuries | -4.62 | -4.65 | 0.02 |
| US High Yield | 5.45 | 5.26 | 0.19 |
| Emerging Markets - Local | -8.89 | -8.75 | -0.14 |
Source: State Street Global Advisors , Bloomberg, as of 12/31/2021.
Credit sectors continued to strengthen relative to US Treasuries, driven by strong economic growth and high demand for income. Year-over-year revenue growth of US corporations rose close to the highest level in over 20 years, which pushed leverage ratios back to pre-Covid levels. Demand for credit remains high, especially from foreign investors looking for yield and from well-funded pensions looking to de-risk. Corporate issuers took advantage of the favorable environment: High yield issuance of $484bn set a new record, while investment grade companies followed up 2020’s record issuance with $1.38tn of net new issuance in 2021, the second highest level ever.
As we look ahead to 2022, economic fundamentals continue to point the way to strong growth, albeit slower than the blistering growth we saw in 2021. We believe inflation will also ebb in the second half of the year as supply/demand imbalances normalize and base effects take hold, though volatility in the Treasury market will continue, especially as the Fed commences a new regime of tighter monetary policy. In addition, the escalation of conflict between Ukraine and Russia is sure to complicate the story of global recovery and we will be keeping a close eye on developments and their effects on the markets as well as our funds.
Key Trends in Indexed Fixed Income
Our fixed income business had a record year, with over net $77bn entering our indexed products (see Figure 2). Investor interest in ETFs grew substantially, with net $16bn of inflows to our Fixed Income SPRDRs platform and the balance coming from institutional investors. Relative to the previous five years, these record inflows were observed across almost all of our strategies. In particular, demand was strong for Multi-Sector and Aggregate ($32bn), US Treasury ($22bn), Investment Grade Corporate Bond ($9bn), and High Yield ($4bn) strategies. In addition, we saw over $2.5bn enter inflation-protected strategies as clients looked to hedge their investments amid increased inflation readings. Lastly, as ESG factors have become increasingly important to investors worldwide, we saw $16bn of inflows into ESG-related strategies.
*Other includes securitized and convertible strategies. Source: State Street Global Advisors
We believe the trend toward indexed fixed income is clear, and we will continue to focus in ways that we believe will benefit clients the most. For the year ahead, we are highlighting three key themes:
- Indexing Indexing is at the core of what we do. We plan to continue to invest in our fixed income indexing platform to extract further value through our implementation process and to expand the breadth of index capabilities available to our clients.
- ETFs More and more clients are looking to ETFs to provide flexibility and liquidity within their broader asset allocations. We continue to add new strategies to our suite of SPDR products in order to support growing demand.
- ESG Environmental, social, and governance issues have come to the forefront of investors’ minds. From the creation of our proprietary R-Factor® rating metric to our work with Bloomberg to construct multiple SASB ESG benchmarks, State Street Global Advisors has been at the forefront of the ESG movement and we will continue to look for innovative ways to integrate ESG principles into fixed income investments.
Conclusion
As we enter a new monetary tightening regime in 2022, we will continue to utilize our deep insights into market structure, liquidity, and risk in order to help clients achieve their fixed income investment goals. As always, we are grateful for your business and trust and look forward to our continued partnership in 2022.