Market Worries and Turbulence in Fixed Income

It has been an interesting ride coming into 2023, in what we believed would be a nice turnaround year. January brought a great sense of optimism with solid greens across the board. February, and now even March, are showing us that volatility and uncertainty still linger and the recovery period we are all hoping for keeps getting pushed back. So what are advisors doing?

Most of my conversations have revolved around managing expectations in fixed income. Everyone is waiting for a great turnaround after seeing the destruction in bonds in 2022. There is a great sense that when US interest rates eventually pause and start to fall again, we should see a very strong bounce back in longer-duration strategies.

This invariably leads my conversation to timing. With volatility persistent and constant, there are still a lot of unknowns around planning for the next market recovery. One thing we can all agree on is bringing down inflation. Canada has already seen inflation drop from the last January CPI print; but until US inflation calms—and with the recent SVB Financial collapse, proof that no adverse contagion effect is affecting the US banking system— we will have to be patient.

In the short term, we believe by moving your fixed income allocation into the ultra-short duration bracket, the opportunity cost for going long in this market environment will bring some volatility. Further, ultra-short duration provided higher YTMs (yield to maturity) than longer-duration products when the yield curve was inverted at the end of 2022 as shown below:

Inverted Yield Curve – No Need to Overreach for Yield

Government of Canada Yield Curve (%)
As of December 31, 2022

Source: Bloomberg L.P., as of December 31, 2022. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses, or sales charges. The performance of the indices does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. Returns assume reinvestment of dividends. It is not possible to invest directly in an index.

Ultra short strategies have been less volatile than equities or longer maturity bonds as can be seen in the chart below tracking the volatility in 2022. The red solid line is the 0-1 year bond universe, which finished slightly positive in 2022 while other longer-duration indices exhibited losses.

Current Market Environment – Nowhere to Hide
Major markets were down in 2022

YTD Returns (%)
As of December 31, 2022

Source: Bloomberg L.P., as of December 31, 2022. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The performance of the indices does not include the deduction of expenses and does not represent the performance of any Franklin Templeton fund. Returns assume reinvestment of dividends. It is not possible to invest directly in an index.

One of the reasons we at Franklin Templeton created the Franklin Bissett Ultra Short Bond Active ETF (FHIS) was to help advisors in this market environment. FHIS is an active ultra-short bond mandate that gives investors access to cash and cash equivalents, T-bills, Banker’s Acceptance Notes, commercial paper, and high quality investment-grade bonds that are at a discount and maturing. There may also be a capital appreciation component to FHIS if bonds are held to maturity and come back to par value. This ETF exhibits both income and appreciation potential. Maturities in the FHIS portfolio run between 0-2 years, while duration is less than six months as of December 31, 2022. FHIS is priced at 15 basis points and managed by the team at Franklin Bissett.

To learn more about Franklin Bissett Ultra Short Bond Active ETF,  please visit our webpage.  

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Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinion, and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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