Not Since the 1970s

That’s how long it’s been since the bond market has turned in such a dismal performance, notes a State Street executive.

By Dorothy Hinchcliff

Although the bond market has recently rebounded a little, 2023 is on pace to be the third consecutive year of negative returns for fixed income. And that performance is remarkable.

“Unless you were in the business when Jimmy Carter was president — I was not — you very likely have not seen a bond market like this,” noted State Street’s Allison Bonds, when I spoke with her in late October at the Schwab Impact conference. She is a managing director of State Street Global Advisors and head of the private wealth management and independent wealth management channels for the company’s US SPDR ETF business.

Indeed, in January 1981, when President Carter left office, bonds were yielding 12% and their value had fallen by more than a third from the time he was inaugurated four years earlier. As a comparison, the performance of the widely followed AGG — iShares Core US Aggregate Bond ETF — was -1.77% in 2021, -13.02% in 2022 and -0.31% as of Nov. 3, according to Morningstar.

When you look at that benchmark, 99% of mutual funds and ETFs in the category are trading at a loss, Bonds said, and when you drill down into specific categories, it’s an even worse story.

How advisors are coping

The silver lining, however, is taking this opportunity to harvest losses to produce tax benefits and move into a lower-cost strategy or reposition with an active manager, she said.

And it appears that may be what some advisors and other investors are doing. One example: On a year-to-date basis, State Street has seen close to $1 billion flow into TOTL, the SPDR DoubleLine Total Return Tact ETF, managed by well-known bond investor Jeffrey Gundlach and his team at DoubleLine, she said.

“Rather than just owning an AGG-like product, where you’re just getting the index, we’re seeing advisors say, ‘Hey, maybe I’ll hire a best-in-breed manager but still within the ETF wrapper. I’ll get all the benefits of ETFs, but I’ll get somebody who’s got experience navigating a challenging fixed-income market like this,’” she said.

In many cases, Bonds said, State Street is seeing advisors take a barbell approach to fixed-income investing, where they keep money in cash and earn about 5% and then also put money in longer-duration Treasurys.

Also, a lot of advisors are using State Street’s customized tax-loss harvesting monitor, she added. The service allows advisors to look at how they can swap investments to get tax benefits and reduce expenses on a client-by-client basis.

Looking ahead

What should advisors do with fixed income as 2024 approaches?

Bonds agrees it’s a tough call, especially with the geopolitical situation, particularly the wars in Ukraine and Israel.

“I think we’re just advocating to be thoughtful. Tax-loss harvest when you can because that is something positive that you can do for clients,” she said.

At the moment, she said, cash looks like a good choice in many cases. “If you want to take a wait-and-see approach with cash right now, we don’t blame people for doing that,” she said. “We’re now seeing advisors for whom cash was an afterthought now spend quite a bit of time thinking about how they’re going to allocate to cash.”

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