Higher Yields Give Bonds a Fresh Case Against Stocks

Related Symbols
FLRN
SRLN

Higher yields have given bonds a fresh case against stocks, according to Matt Bartolini, global head of research strategists at State Street Investment Management. He spoke during an Oct. 20 webcast hosted by VettaFi Head of Research Todd Rosenbluth and sponsored by State Street.Key Takeaways: Floating-rate notes and senior loans were presented as ways to earn income with less sensitivity to rate swings. AI spending, at roughly 2% of GDP, is approaching the scale of the 1880s railroad build-out. Municipal bonds and CLOs rated AAA drew interest as alternatives to tightly priced investment-grade corporates. Bartolini pointed to the equity risk premium, a gauge of the extra return stocks offer over bonds. By the end of September, he said, “TINA had left the building.” The phrase refers to “there is no alternative,” the idea that investors must own stocks because bonds pay so little. Not every bond fund has benefited, though. All U.S.-listed ETFs in the intermediate core-plus category have negative price returns this year, according to Bartolini’s team. Still, more than seven in 10 attendees polled said they were cautiously rebalancing and adding a little fixed income exposure. Part of the problem is the makeup of the Bloomberg U.S. Aggregate Bond Index, Bartolini said. The index weights bonds by market value, so heavy Treasury issuance gives Treasurys a bigger share. If U.S. public debt tops 150% of GDP over the next decade, Treasurys could make up 55% of the index. See more: Rates Hit Multi-Decade Highs. Will Growth and Earnings Keep the Rally Going? Bartolini instead favors floating-rate bonds, whose payments reset as rates change. He named the State Street SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN B+), which he said carries “really no duration risk.” For more credit exposure, he pointed to the actively managed State Street Blackstone Senior Loan ETF (SRLN A+).Growth or Inflation? Panelists Split on BondsScott Ladner, chief investment officer at Horizon, pushed back on what is driving rates. “I think the reason why we have high rates is because we have higher growth,” he said. Ladner expects nominal GDP growth, which includes inflation, of 6-8%, supporting 10-year Treasury yields in the 5% range. He tied that growth to artificial intelligence spending, which he put at about 2% of GDP. The 1880s railroad build-out, by comparison, reached about 3.5%. Even so, he reached a similar conclusion. When inflation is the main risk, stocks and bonds tend to move together, as they did in 2022, Ladner said. That means investors have “got to use active management on the bond side.” Michael Contopoulos, head of multi-asset macro investing at Janus Henderson Investors, called the view that recent price spikes are one-off shocks “incredibly lazy analysis.” In his view, a shift away from globalization means the U.S. is now importing inflation. Janus Henderson’s duration has ranged from eight years to 2.5 years and now sits around 4.5 years, Contopoulos said. He warned against investment-grade corporate bonds while spreads, or the extra yield they pay over Treasurys, sit near all-time tights. “You own all the downside of business risk and all the downside of interest rate risk,” Contopoulos said. Instead, he favors collateralized loan obligations rated AAA, or bundles of corporate loans. They carry virtually no default or rate risk, Contopoulos said. Municipal bonds also offer an entry point after selling off earlier this fall, according to him. Investors can harvest those losses for tax purposes and roll into new holdings heading into 2027. For more news, information, and analysis, visit the ETF Strategist Content Hub.

Higher Yields Give Bonds a Fresh Case Against Stocks

More Commentary

Search Commentary