Close Close
ThinkAdvisor
Percentage Sign Locked With Keypad Lock

Portfolio > ETFs > Bond

Advisors See Benefits From High Interest Rates, Expect Yield Curve to Flip Soon: Survey

By Michael S. Fischer

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • On 10-year notes, participants suggested that the inverted yield curve may be ending, InspereX said.
  • Financial professionals said that higher-yielding fixed income has had a positive effect on their business.
  • Those surveyed say that client relationships, not technology or performance, set them apart from competitors.

Sixty-two percent of financial advisors in a new survey from InspereX say that rates on 2-year U.S. Treasurys are now at peak, while 26% believe that rates will hit 6% and 12% said that they will rise to between 7% and 9% over the next 18 months. 

Advisors think differently about the 10-year Treasury, suggesting that the inverted yield curve may be coming to an end, InspereX said. Thirty-four percent of participants believe that 10-year rates have peaked, and 24% expect them to hit 5% over the next year and a half. Thirty-one percent said they would rise to 6%, 10% said between 7% and 9%, and 1% said 9%. 

“The rising rate environment has meant one thing for fixed income markets: Bonds are back and once again at the forefront of the asset allocation discussion,” John Tolar, head of fixed income sales and trading at InspereX, said in a statement. 

“Here at InspereX, we saw sales reach 10-year highs in both October and November, with more than $12 billion in fixed income notional value distributed. Our results were driven by robust sales for InterNotes, corporate debt offerings designed for individual investors, which had their best performance of the year in November.”

RedZone Marketing conducted the survey between Oct. 23 and Oct. 30 among 384 financial professionals from RIAs, banks, broker-dealers and regional firms. During the survey period, the 2-year Treasury closed as high as 5.145%, while the 10-year Treasury closed as high as 4.961%. The S&P 500 closed as high as 4,247. 

Rising Rates Benefit Advisors 

According to the financial advisors surveyed, higher-yielding fixed income has had a positive effect on their business:

  • Clients are moving some of their equity allocation into fixed income: 68%
  • Higher rates have made conversations with clients more positive: 65%
  • Clients are eager to lock in higher rates for as long as possible: 61%
  • Higher rates have made it easier to win new business: 52%

But advisors offered a word of caution about higher rates, with 59% reporting that investors are looking only at rates and do not understand that they can lose money in fixed income. And more than half said that clients do not believe that the 60/40 portfolio is back. 

“It’s refreshing to see advisors express optimism within fixed income markets moving forward, as they’re forecasting an end to the prolonged inversion of the yield curve,” Tolar said. 

He noted that in last year’s survey, 74% of advisors said they expected the inverted yield curve to continue into the 2023 second quarter, including 40% who expected it to last beyond the third quarter. 

“If advisors are correct again, perhaps curve steepening will come to fruition in 2024,” Tolar said. 

Survey participants said that they and their clients are largely aligned over their biggest concerns going forward: geopolitics, market volatility, inflation, recession, rising interest rates and the U.S. political divide. 

However, they diverge dramatically on the subject of a stock market correction. Respondents said this is their clients’ second-biggest worry, while they themselves said it is their least concern.

How Individual Bonds Help

In 2024, the survey found, advisors are more likely to increase their use of individual bonds to generate income for clients than any other type of investment. Specifically, these are the investments they plan to use more for income: 

  • Individual bonds: 35%
  • Dividend-paying stocks: 34%
  • Bond funds/exchange-traded funds: 30%
  • Cash or cash equivalents: 28%
  • Certificates of deposit: 25%

Two-thirds of advisors said they are embracing the benefits of individual bonds with their clients. Thirty percent said doing so helps customize client portfolios. Seventeen percent said it helps show added value to clients, and another 17% said it improves overall performance.

“As yield has returned to the market, advisors have acted on the opportunities to secure income for their clients and insulate portfolios from potential broad market drawdowns and the near certainty of heightened market volatility in the coming year,” Tolar said. “The growing likelihood of the higher-for-longer environment has also been especially beneficial for their bottom lines.” 

Relationships Matter 

Financial advisors in the survey were far more likely to say that relationships with their clients is what sets them apart from competitors — not customized solutions or portfolio performance. 

As for the most concerning behaviors they see in their clients, 28% said that clients are often influenced by what they read and hear from the investment media. Twenty-seven percent worried about their short-term thinking that trumps a long-term view, and 23% said that their stock market performance expectations are too high.

When it comes to the effect of artificial intelligence and technology on their business, 79% of advisors said they would welcome more technology to help monitor client portfolio performance. At the same time, 63% said that real-world experience is better at predicting market trends than technology. 

Michael S. Fischer

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.