In a reversal from last quarter, guidance from Federal Reserve (Fed) policymakers and traders’ forecasts have coalesced around more rate hikes on the horizon.1 Previously, traders were forecasting rate cuts by yearend.2
The reason for the hawkish outlook? Stubborn inflation, a resilient consumer, healthy labor trends, and strong equity markets.
At the same time, consumer and labor market strength have sparked hope that the US economy will avoid a recession, even though the yield curve remains inverted.3
This optimism has fueled credit sector returns despite the negative ratings trends, where downgrades have outpaced upgrades for four consecutive quarters.4 And higher returns have pushed valuations to unattractive levels — as spreads sit 20% below their historical average.5
So, where does that leave bond investors this summer? Consider the following to help address current fixed income challenges:
Active core strategies to position portfolios for evolving monetary policy, higher rates, and mixed fundamentals in credit markets.
Short-duration bonds where elevated yields offer income while minimizing total risks — with potential for more income if the Fed does hike rates.
Hybrid exposures like convertible securities that allow portfolios to extend risk in a more balanced way.
By combining traditional and non-traditional fixed income asset classes to maximize total return over a full market cycle, active sector allocation and security selection can potentially better defend against rate and credit risk than core aggregate bonds.
Analysis of the actively managed SPDR® DoubleLine® Total Return Tactical ETF’s (TOTL) rolling six-month returns versus its peer group median highlights the fund’s defensive qualities:
Lower volatility from the largest part of your bond portfolio takes on greater importance in today’s market, given that the 90-day realized volatility of the Bloomberg US Aggregate Bond Index (Agg) is back over 6%. The Agg is now in the 93rd percentile for volatility over the last 35 years7 — surpassing both the Great Financial Crisis and the COVID-19 pandemic.
Core bonds also continue to be mired in double-digit drawdowns —their worst ever, as shown below. Duration on the rate-sensitive Agg is already at 6.3 years, 30% above its long-term average and in its historical 95th percentile.8 And, there’s little hope for light at the end of the tunnel if the Fed follows through on its rate hikes.
That’s why we believe it makes sense to own high-quality, uncorrelated assets that can help limit a portfolio’s rate sensitivity and defend against losses during periods of rate and total market volatility.
TOTL combines the Agg’s traditional bond sectors with credit-sensitive sectors such as high yield corporates and bank loans. And the fund’s embedded mortgage bias enhances its credit quality, as these securities are backed by the federal government.
With 74% exposure to investment-grade rated debt, 58% of TOTL is AAA rated.9 As a result, it has been able to mitigate volatility while remaining a source of returns.
In addition to outperforming the Agg by 145 basis points (bps) over the past year,10 TOTL also exhibits:
Investors who want to sharply trim duration in the core, while retaining broad sector exposure and the potential for alpha generation, may want to consider the short-term version of TOTL.
The SPDR® DoubleLine® Short Duration Total Return Tactical ETF (STOT) employs a similar approach to TOTL, but seeks to maintain a dollar weighted average effective duration between one and three years.
Outperforming its benchmark and the Agg by 280 and 461 bps over the past year,14 STOT now has a:
Potential for the fed funds rate to reach 5.75% this year16 is creating above-average income opportunities in ultra-short duration markets — the sector most sensitive to Fed policy.
US 1-3 month T-bills have historically tracked the fed funds rate, given their ultra-short and cash-like nature, as shown below. If this relationship holds, this ultra-short duration of only 0.08 years could see its income potential increase alongside policymakers’ actions.17
A 5.75% yield on US 1-3 month T-Bills also would further increase the differential with the 5% earnings yield on the S&P 500 Index — indicating relative attractiveness to stocks as well as core bonds.18
Low duration, high yield, and significantly low volatility make US 3-month T-bills the closest market to cash instruments. The sector’s yield-per-unit-of-volatility is an astounding 12.5 (5.25% yield versus 0.42% daily standard deviation over the past year) compared to 0.53 for the broader Aggregate bond market.19
For exposure to this tenor of the yield curve, consider the $28 billion SPDR® Bloomberg 1-3 Month T-Bill ETF (BIL).
Investors who are comfortable with a little more volatility can potentially eke out more yield with the SPDR® Bloomberg 3-12 Month T-Bill ETF (BILS).
This segment has a slightly higher yield (5.34%), duration (0.33 years), and volatility (0.52% daily standard deviation of returns) — but with the same comparable advantages versus broader bonds.20
Also, an active ultra-short strategy can access other attractive bond segments such as securitized credits, asset-backed securities, mortgage-backed securities, and commercial mortgage-backed securities.
The actively managed SPDR® SSGA Ultra Short Term Bond ETF (ULST) invests at least 80% of its net assets in a diversified portfolio of US dollar-denominated investment-grade fixed income securities, including up to 10% in high yield. The fund targets a duration of 1 year or less and a weighted average maturity of 2.5 years or less.
Given its credit selection and risk management tactics, ULST currently offers a higher yield than the broader Agg (SEC Yield of 5.3% versus Agg yield-to-worst of 4.8%),21 but with 76% less volatility.22
With ULST, lower volatility doesn’t mean lower returns. The ETF is outperforming the Agg this year (+2.39% versus 2.09%) and over the past 12 months (+4.24% versus -0.94%). It’s also outperforming its peer group median manager by 43 bps over the past 12 months.23
Due to their maturity focus, income potential, and volatility profile relative to the broader market, BIL, BILS, and ULST may help bond investors strike a better balance between risk and return this summer.
Credit markets have produced positive returns this year, despite weak fundamentals and ratings sentiment. But positive returns have pushed credit spreads on high yield to around 400 bps.24 That’s roughly 20% below the historical long-term average.25
Somewhat stretched valuations can impact subsequent returns, as future gains may not benefit from the spread compression witnessed so far this year. Historically, when spreads move at or below 400 bps, subsequent 12-month returns for high yield, while positive, are below average (5.4% versus 7.2%).26 Despite those risks, high yield bonds rallied in the first half just as stocks did. But given current valuations, the path ahead may be more challenging.
Investors seeking to participate in the current market rally, but with less volatility and more constructive valuations, may want to consider convertible securities due to their sector exposure, historical volatility traits, and more bond-like profile.
More than half the exposure (52%) in the SPDR® Bloomberg Convertible Securities ETF (CWB) is allocated to the three sectors that are leading GICS sector returns so far this year — Consumer Discretionary, Technology, and Communication Services.27 But the fund has exhibited 37% lesser volatility than the S&P 500 this year.28
While valuations are stretched within equities (the S&P 500 price-to-earnings ratio is above average),29 convertibles trade in a more bond-like balanced profile, as their delta to the underlying equities is 26% below its historical average.
Convertibles’ low delta is also met with a higher than average premium, as shown below. This shows convertibles are trading more like bonds and that valuations aren’t stretched. And, if we look at the price-to-earnings ratio (P/E) of underlying firms, the average P/E is 15 and below its recent 5-year average of 17.30
Unstretched valuations for converts, and for the underlying equities, are fueling forecasts for higher earnings growth than the market (20% vs.14%).31
And while convertibles is a non-traditional bond sector, liquidity is not a concern. Issuance is up 198% year-over-year, as issuers are looking to save on coupon costs versus straight debt, considering converts carry a lower coupon in exchange for equity upside.32
And, the issuance is not all below investment-grade (IG), speculative issuers. In fact, IG bonds now account for 33.5% of 2023 issuance.33 Lastly, more balanced bond structures (low delta) have accounted for 100% of all 2023 issuance.34 These trends may lead to supportive risk/reward characteristics for the overall market, as it’s not being inundated with stock-like, weak credits.
Overall, convertible securities may offer risk-controlled equity exposure with potential for upside growth — but with less volatility than straight equity.
If you’re an investor who wants to participate in the market’s rally in a more measured way, take a look at converts and CWB.
For more insight into how to manage portfolios in this challenging environment, check out our Market Trends page for timely analysis, macroeconomic perspectives, and ETF flows data.
Fund Performance as of 6/30/2023
|Ticker||Name||QTD||YTD||Annualized||Inception Date||Gross Expense Ratio|
|1 Year||3 Year||5 Year||10 Year||Since Inception|
|TOTL||SPDR® DoubleLine® Total Return Tactical ETF (NAV)||-0.10%||3.16%||0.49%||-2.94%||0.28%||-||0.80%||2/23/2015||0.55|
|TOTL||SPDR® DoubleLine® Total Return Tactical ETF (MKT)||-0.03%||3.27%||0.88%||-2.94%||0.34%||-||0.83%||2/23/2015||0.55|
|STOT||SPDR® DoubleLine® Short Duration Total Return Tactical ETF (NAV)||1.15%||2.67%||3.24%||0.08%||1.36%||-||1.30%||4/13/2016||0.45|
|STOT||SPDR® DoubleLine® Short Duration Total Return Tactical ETF (MKT)||1.08%||2.58%||3.23%||0.10%||1.35%||-||1.31%||4/13/2016||0.45|
|BIL||SPDR® Bloomberg® 1-3 Month T-Bill ETF (NAV)||1.18%||2.25%||3.56%||1.16%||1.38%||0.82%||0.78%||5/25/2007||0.1345|
|BIL||SPDR® Bloomberg® 1-3 Month T-Bill ETF (MKT)||1.20%||2.26%||3.57%||1.17%||1.39%||0.82%||0.78%||5/25/2007||0.1345|
|BILS||SPDR® Bloomberg® 3-12 Month T-Bill ETF (NAV)||1.02%||2.15%||3.22%||-||-||-||1.05%||9/23/2020||0.135|
|BILS||SPDR® Bloomberg® 3-12 Month T-Bill ETF (MKT)||1.04%||2.14%||3.22%||-||-||-||1.07%||9/23/2020||0.135|
|ULST||SPDR® SSGA Ultra Short Term Bond ETF (NAV)||1.04%||2.38%||4.24%||1.49%||1.82%||-||1.39%||10/9/2013||0.2|
|ULST||SPDR® SSGA Ultra Short Term Bond ETF (MKT)||1.02%||2.36%||4.27%||1.44%||1.82%||-||1.40%||10/9/2013||0.2|
|CWB||SPDR® Bloomberg Convertible Securities ETF (NAV)||4.68%||9.45%||10.83%||7.51%||9.02%||9.67%||10.84%||4/14/2009||0.4|
|CWB||SPDR® Bloomberg Convertible Securities ETF (MKT)||4.96%||9.74%||10.93%||7.43%||9.08%||9.65%||10.85%||4/14/2009||0.4|
Past performance is not a reliable indicator of future performance. 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. All results are historical and assume the reinvestment of dividends and capital gains. Visit ssga.com for most recent month-end performance. Performance returns for periods of less than one year are not annualized. The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.
Bloomberg US Aggregate Bond Index A benchmark that provides a measure of the performance of the US dollardenominated investment-grade bond market. The “Agg” includes investment-grade government bonds, investment-grade corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities and asset-backed securities that are publicly for sale in the US.
Credit Spread The spread between the yield on a bond and the yield on the equivalent duration matched government bond. Dispersion The difference in returns between one asset class or market exposure to another.
Duration A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
High Yield A company or bond that is rated “BB” or lower is known as junk-grade or high yield, in which case, the probability that the company will repay its issued debt is deemed to be speculative.
Treasurys The debt obligations of a national government. Also known as “government securities,” Treasuries are backed by the credit and taxing power of a country, and are thus regarded as having relatively little or no risk of default.
Volatility The tendency of a market index or security to jump around in price. Volatility is typically expressed as the annualized standard deviation of returns. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to higher potential losses.
Yield The income produced by an investment, typically calculated as the interest received annually divided by the price of the investment. Yield comes from interest-bearing securities, such as bonds and dividend-paying stocks.
1 “The Fed forecasts two more hikes in 2023, taking rates as high as 5.6%”, CNBC, June 2023
2 Bloomberg Finance L.P. as of June 30, 20233 Bloomberg Finance L.P. as of June 30, 2023
3 Bloomberg Finance L.P. as of June 30, 2023
4 Bloomberg Finance L.P. as of June 30, 2023 based on S&P Ratings actions for US High Yield Issuers
5 Bloomberg Finance L.P. as of June 30, 2023 based on the Bloomberg US High Corporate Bond Index
6 Morningstar, 03/01/2015 to 06/30/2023. Analysis is based on rolling six-month returns with a one-month moving step, creating 91 observable periods. Peer group defined as all US-listed ETFs and US domiciled mutual funds (oldest share class) in the Intermediate Core-Plus Morningstar Category. 226 funds analyzed. US equities defined as the S&P 500 Index. Past performance is not a reliable indicator of future performance
7 Bloomberg Finance L.P. as of June 30, 2023 based on the rolling 90-standard deviation of daily returns for the Bloomberg US Aggregate Bond Index.
8 Bloomberg Finance L.P. as of June 30, 2023 based on the Bloomberg US Aggregate Bond Index
9 ssga.com, as of June 30, 2023
10 Bloomberg Finance L.P as of June 30, 2023
11 Bloomberg Finance L.P as of June 30, 2023
12 Ssga.com, Bloomberg Finance L.P. based on the 30 Day SEC Yield TOTL, the yield-to-worst on the Bloomberg US Aggregate Bond Index and the duration of TOTL and the Bloomberg US Aggregate Bond Index
13 SSGA.com, Bloomberg Finance L.P. based on the 30 Day SEC Yield TOTL, the yield-to-worst on the Bloomberg US Aggregate Bond Index and the one-year standard deviation of returns for TOTL and the Bloomberg US Aggregate Bond Index
14 Bloomberg Finance L.P as of June 30, 2023
15 Ssga.com, Bloomberg Finance L.P. based on the 30 Day SEC Yield STOT, the yield-to-worst on the Bloomberg US Aggregate Bond Index and the duration, and the one-year standard deviation of returns for STOT and the Bloomberg US Aggregate Bond Index
16 Bloomberg Finance L.P., as of 06/30/2023. Based on Federal Open Market Committee Dot Plot
17 Bloomberg Finance L.P. as of June 30, 2023
18 Bloomberg Finance L.P. as of June 30, 2023 based on the one-year standard deviation of returns for Bloomberg US Treasury Bill: 1-3 Months Index and the Bloomberg US Aggregate Bond Index
19 Bloomberg Finance L.P. as of June 30, 2023
20 Bloomberg Finance L.P. as of June 30, 2023 based on the Bloomberg US Treasury Bill 3-12 Months Index
21 SSGA.com as of June 30, 2023 and Bloomberg Finance L.P. as of June 30, 2023
22 Bloomberg Finance L.P. based on 1-year standard deviation of returns for ULST and the Bloomberg US Aggregate Bond Index as of June 30, 2023
23 Morningstar as of June 30, 2023 Peer group defined as all US-listed ETFs and US domiciled mutual funds (oldest share class) in the Morningstar Ultrashort Bond Category
24 Bloomberg Finance L.P. as of June 30, 2023 based on the Bloomberg US High Yield Corporate Bond Index
25 Bloomberg Finance L.P. as of June 30, 2023 based on the Bloomberg US High Yield Corporate Bond Index
26 Bloomberg Finance L.P. as of June 30, 2023 based on the Bloomberg US High Yield Corporate Bond Index from 1993- 2023 based on monthly 12-month returns
27 Consumer Discretionary, Technology, and Communication Service based on Bloomberg Finance L.P., 12/31/2022 to 06/30/2023
28 Based on the standard deviation of returns CWB and the S&P 500 Index per Bloomberg Finance L.P. as of June 30, 2023
29 Bloomberg Finance L.P. as of June 30, 2023
30 Bloomberg Finance L.P., as of June 30, 2023 based on a portfolio of the underlying equities within CWB using the current weights of the firms overall convertible security held in the portfolio
31 Bloomberg Finance L.P., as of June 30, 2023 based on 3-5 year consensus analyst estimates for EPS growth on the S&P 500 Index and a portfolio of the underlying equities within CWB using the current weights of the firms overall convertible security held in the portfolio per SPDR Americas Research
32 Barclays, US Convertible Strategy May 2023
33 Barclays, US Convertible Strategy May 2023
34 Barclays, US Convertible Strategy May 2023
Important Risk Discussion
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
The views expressed in this material are the views of Matthew Bartolini through the period ended July 3, 2023 and 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.
All information is from SSGA unless otherwise noted and 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, and it should not be relied on as such.
Past performance is not a reliable indicator of future performance.
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 SSGA's express written consent.
Investing involves risk including the risk of loss of principal.
Diversification does not ensure a profit or guarantee against loss.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.
Actively managed funds do not seek to replicate the performance of a specified index. An actively managedfund may underperform its benchmarks. An investment in the fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
TOTL and HYBL are actively managed. The sub-adviser’s judgments about the attractiveness, relative value, or potential appreciation of a particular sector, security, commodity or investment strategy may prove to be incorrect, and may cause the fund to incur losses. There can be no assurance that the sub-adviser’s investment techniques and decisions will produce the desired results.
Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates rise, 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.
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.
Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy. Other risks associated with convertible bond investments include: Call risk which is the risk that bond issuers may repay securities with higher coupon or interest rates before the security's maturity date; liquidity risk which is the risk that certain types of investments may not be possible to sell the investment at any particular time or at an acceptable price; and investments in derivatives, which can be more sensitive to sudden fluctuations in interest rates or market prices, potential illiquidity of the markets, as well as potential loss of principal.
Investments in asset backed and mortgage-backed securities are subject to prepayment risk which can limit the potential for gain during a declining interest rate environment and increases the potential for loss in a rising interest rate environment. U.S. Treasury obligations may differ from other fixed income securitites in their interest rates, maturities, times of issuance, and other characteristics. Similar to other issuers, changes to the financial condition or credit rating of the U.S. government may cause the value of the Fund’s U.S. Treasury obligations to decline.
An annualized yield that is calculated by dividing the investment income earned by the fund less expenses over the most recent 30-day period by the current maximum offering price.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
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Distributor: State Street Global Advisors Funds Distributors, LLC is the distributor for some registered products on behalf of the advisor. SSGA Funds Management has retained DoubleLine Capital LP and Blackstone Liquid Credit Strategies LLC as the sub-advisors. State Street Global Advisors Funds Distributors, LLC is not affiliated with DoubleLine Capital LP or Blackstone Liquid Credit Strategies LLC.