What's Hot in Fixed Income for Advisors?

Fixed income is a relatively broad asset class. Unlike equities, which are generally considered to be relatively risky investments, risks in fixed income can vary dramatically by asset class — consider the risks of money market funds versus high-yield bonds.

In this piece, I provide some perspective about how interest in various fixed income classes has evolved from May 2020 to May 2023 using six surveys conducted among financial advisors. I find that there have been significant shifts in interest over the period, especially with respect to U.S. Treasurys.

This information is potentially useful to financial advisors because it not only provides perspective about what types of fixed income asset classes are actively being considered but also points to fixed income sectors in which financial advisors should be familiar with the available products and strategies.

Inside the Surveys

The analysis relies on six separate surveys conducted by PGIM Investments, in May 2020, November 2020, February 2021, February 2022, February 2023 and May 2023. The surveys each consist of about 450 financial advisor respondents, with a cross section across channels and varying levels of assets under management.

A series of questions on the survey ask the advisor about how attractive the opportunity is in given fixed income sectors, which include U.S. Treasurys, mortgage-backed securities, investment-grade corporates, high-yield bonds, bank loans, Treasury Inflation Protected Securities, municipal bonds, commercial mortgage-backed securities, asset–backed securities, collateralized loan obligations, emerging market bonds in local currency, emerging market bonds in home currency and non-U.S. bonds.

There are five possible responses with respect to each asset class: Very Attractive, Moderately Attractive, Neutral, Moderately Unattractive and Very Unattractive, which I assign scores of 1.0, .5, 0, -.5, and -1.0, respectively, and create what I call the "Net Attractiveness Score." I assign scores in an attempt to capture the differences in perspectives across classification levels.

The accompanying exhibit includes the average score for each of the asset classes included in the survey for the six periods.

There has been a dramatic shift in perspectives over this three-year period, especially in U.S. Treasurys, which saw a significant spike in interest between February 2022 and February 2023.

For example, U.S. Treasurys were the least attractive asset class in May 2020 (with a score of -0.20), when yields on 10-year Treasury bonds were approximately 70 basis points, but were the most attractive fixed income asset class in May 2023 (with a score of 0.45), when yields on 10-year Treasurys were approximately 370 basis points (or roughly 300 basis points higher) and yields on three-month Treasurys were around 530 basis points.

In contrast, investment-grade corporate bonds (IG Corp) have remained attractive at a relatively constant rate among financial advisors, along with municipal bonds, followed by high-yield bonds. Interest in non-U.S. bonds has been especially low over the period, along with emerging market bond funds.

The Only Constant Is Change

It's incredibly important for financial advisors to stay abreast of the changing market environment to ensure that client portfolios are optimally designed to help them accomplish goals. As markets evolve, the suite of products or strategies is likely to evolve as well.

This analysis demonstrates that advisor perspectives on fixed income asset classes have changed significantly over the past three years, suggesting that advisors need to be consistently refreshing their knowledge in the space.