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The Fixed Income Markets Today 

January 19, 2016

Gary Stringer, Kim Escue, & Chad Keller, ETF Trends

Over the past few weeks leading up to the end of 2015, we have experienced a pick-up in volatility in the fixed income markets. This volatility is most evident within the high yield sector, which has been under stress throughout the year. This stress, coupled with the end of nearly seven years of zero rates and indications that we could see more rate hikes in 2016, has pulled a lot of attention onto the fixed income market and raised many questions regarding how to allocate within the asset class. The bond market requires a dynamic approach, in our view. The asymmetric nature of bond market returns, which entails the potential for large downside risks with little upside potential, leads to our focus on risk management. We have increased credit quality and reduced liquidity risk by eliminating our positions in high yield bonds and bank loans as well as reducing our exposure to corporate bonds. We have increased our allocations to government bonds, mortgages and structured products, including asset backed securities.

The fixed income markets have historically been very fragmented, therefore we take a dynamic approach to investing in bonds. Our focus is on potential downside risk when thinking about our fixed income allocation. This approach is especially important due to the asymmetrical return profile of the asset class, which involves more downside potential and a somewhat limited upside. Several risk factors come into consideration when investing fixed income dollars. Interest rates, default rates, credit risk and liquidity are some of the key considerations when determining the risk budget for a fixed income allocation.Read more

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