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.
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
Composite Return (1Y)
Index Return (1Y)
1-3 US Credit
Intermediate US Credit
Long US Credit
1-3 US Treasuries
3-10 US Treasuries
Long US Treasuries
US High Yield
Emerging Markets - Local
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.
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.
1 Based on one year performance as of September 30, 2021.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
Investing involves risk including the risk of loss of principal.
The views expressed are the views of Matthew J. Steinaway through February 28, 2022, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
Investing in high yield fixed income securities, otherwise known as “junk bonds,” is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio’s specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio’s ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.