Bryan Hazelton, CFA, Associate Portfolio Manager, Full Discretion Team, and David Zielinski, CFA, Investment Director, Full Discretion Team at Loomis, Sayles & Company, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the implications of the growing weight on government debt in the Bloomberg US Aggregate Bond Index (“Agg”).
The Bloomberg US Aggregate Bond Index is widely used by investors as a policy benchmark and as a barometer for risk and return in the US fixed-income market. The sector weights of the index continue to change, with US Treasurys now 44% of the index, up from 27% in 2000. This increase in weight is driven by fiscal expansion in the Treasury debt market, with rapid issuance to support markets during the 2008 global financial crisis and again in 2020 during COVID-19. As Treasury debt is issued at longer maturities, the duration of the index has risen from 4.5 in 2000 to around 6.0, which increases the interest rate risk for aggregate bond investors.
Zielinski notes that investors should expect the weight on Treasurys in the index to continue to rise as US government budget deficits are likely to lead to continual growth in Treasury issuance. With annual deficits exceeding $2 trillion, Treasury issuance is likely to be larger than the new debt issued by the corporate and agency mortgage-backed securities (MBS) markets. By the end of the decade, Treasury debt could reach a 50% weight in the index.
Hazelton states that governments worldwide are likely to increase debt and deficits as they explore protectionist policies. Investors may consider non-US government debt as an alternative to investing in Treasurys. Changes in trade policies may result in a lower demand for US dollar-denominated assets. The term premium on US Treasurys is likely to increase with growing issuance, aging demographics, deglobalization, and higher deficits. As a result, Hazelton expects investors to demand a higher premium to invest in US Treasurys, with investors likely to find value when investing in issues not included in the aggregate index.
Zielinski notes that the changes in the Agg over the last two decades strengthen the case for active management. While the aggregate index is increasingly dominated by interest rate risk, investors diversifying beyond the Agg will have a greater portion of returns correlated to credit risks, while generating higher total yields. Investment-grade debt has gone through a multi-year upgrade cycle, with balance sheets currently at very strong levels. Investment-grade debt may offer better value than US Treasurys in the current market. Investors unconstrained by the aggregate index are freed to pursue alternative and attractive risk premia. Investors may wish to consider bank loans, high-yield debt, securitized credit, and lower-quality investment-grade issues. Investors are advised to wait, however, before investing in debt issued by corporations that are likely to be impacted by tariffs. Active managers have the flexibility to rotate portfolios quickly in response to, or anticipation of, market conditions.
Resources:
Institutional Fixed Income Strategies
Important Disclosure
This marketing communication is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the speakers only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis does not represent the actual or expected future performance of any investment product. We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy. The information is subject to change at any time without notice.
Indices are unmanaged and do not incur fees. It is not possible to invest directly in an index.
Commodity, interest and derivative trading involves substantial risk of loss.
This is not an offer of, or a solicitation of an offer for, any investment strategy or product.
Any investment that has the possibility for profits also has the possibility of losses, including the loss of principal.
Market conditions are extremely fluid and change frequently.
Diversification does not ensure a profit or guarantee against a loss.
Past market experience is no guarantee of future results.
SAIFdri5lbzl