A Model Portfolio for Today’s Back-Breaking Bond Market

To say it’s getting difficult to navigate today’s fixed income market is something of an understatement. However, advisors can build an effective plan of attack with the WisdomTree Fixed Income Model Portfolio. “This model portfolio is focused on a diversified stream of income.

Source: A Model Portfolio for Today’s Back-Breaking Bond Market

It seeks to benefit from secular trends we see evolving in the fixed income markets in a risk-conscious manner. The model portfolio focuses on select opportunities in core sectors, while strategically allocating among sectors and extending the model portfolio’s reach globally,” according to WisdomTree.

The WisdomTree Fixed Income Model Portfolio features eight ETFs with varying credit qualities and durations. With budget deficits beyond bloated, the model portfolio is worth considering today.

“When budget deficits are running in the multi-trillions, guess what? You have to finance this huge gap. That is exactly what is happening for the Treasury debt managers,” said WisdomTree Head of Fixed Income Kevin Flanagan in a recent note. “At this point, the federal government’s financing needs reflect the baseline trillion-dollar deficit coming into this fiscal year as well as any holdovers from the prior pandemic-related fiscal stimulus packages that were enacted. Thus, the $900 billion package from December is part of the mix, but the $1.9 trillion dollar proposal currently being debated in the Senate would be another enormous add-on.”

Deficits and Stimulus Galore

The Federal Reserve has made it clear it will hold interest rates at historic lows for some time, turning attention to fiscal policy and its affect on the bond market.

Yet this model portfolio’s bond exposure isn’t overly reliant on long-term Treasuries. It features short duration exposure, as well as allocations to investment-grade and junk corporates.

See also: A Model Portfolio Marvel: Bundled ETFs Are Taking Off

“The other issue to stand out is the 7-Year note, where the present auction amount is an incredible $30 billion more than a year ago,” adds Flanagan. “The abysmal reception at the most recent auction for this maturity not only made headlines, but also got me thinking that maybe there are limits as to how much paper can be digested without investors commanding higher yields in return. The remaining note structure (2-, 3-, 5-Year) is $20 billion higher for each maturity, with the aforementioned 10-Year note being $14 billion above its 2020 reading.”

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Leave a Reply