Clients Shocked At Volatility of Fixed Income Market in 2022;

See Fixed Income Opportunities For Tax Loss Harvesting & Adding Potentially Higher Yield

Advisors Say Inflation Has Peaked but Inverted Yield Curve Will Go Deep into 2023

Individual Bond Use Emerges With Benefits to Client Portfolios and Relationships

According to the new InspereX 2023 Advisor Outlook Survey, financial advisors see improved performance for stocks next year: almost half (49%) said they expect the stock market to rise at least 10% in 2023, including 13% seeing it up 20% or more. Another 25% expect the market to be flat, while 26% expect the market will be down at least 10%.

Regarding fixed income, 74% of advisors said they expect the inverted yield curve between 2-year and 10-year Treasuries to continue into the second quarter of 2023, including 40% who expect it to last beyond the third quarter. An inverted yield curve means short-term yields are higher than long-term – and is often considered a signal for recession.

Advisors see rising inflation in the rearview mirror, with 75% saying it has peaked.

InspereX is the technology company transforming how fixed income and market-linked products are accessed, evaluated, and traded. The 2023 Advisor Outlook Survey was conducted between November 8 and 21, 2022, among 270 financial advisors by Red Zone Marketing. Respondents represent advisors from independent and regional broker/dealers, banks, and RIAs.

“While many advisors are bullish on stocks in 2023 and optimistic about moderating inflation, their views on a continuation of the inverted Treasury yield curve indicate that the first half of the year could be bumpy,” said InspereX President David Rudd.

Clients Shocked By 2022 Fixed Income Volatility, But Undaunted

More than three-quarters (77%) of advisors surveyed said their clients were shocked by the volatility in the fixed income market in 2022. But 78% also said their clients were not too scared to invest in fixed income right now.

More than half (53%) said their clients are more comfortable with volatility than they were in the past; and 59% said their clients are jumping at fixed income offerings with potentially higher yields. In fact, 88% said that today’s higher fixed income interest rates create better client conversations.

Also, 69% of advisors said their clients will use fixed income for tax loss harvesting this year, and 53% say it will take years to recover from the fixed income losses of 2022.

“Interest rates rose quickly in 2022, negatively impacting existing bond holders. But advisors are recognizing and taking advantage of numerous opportunities for their clients, including harvesting tax advantages,” Rudd said. “Now more than ever, advisors are showing their value.”

Individual Bonds Emerge As Important For Creating Alpha Plus Stronger Relationships

According to the survey, 68% of financial advisors are using individual bonds with their clients. The bonds they are using right now include Treasuries (85%), Municipals (77%), and Corporates (75%).

Advisors who use bonds said the five greatest benefits individual bonds deliver are:

• Predictable income – 85%
• Return of principal at par – 82%
• It’s how I demonstrate value to my clients – 37%
• Transparent pricing of new issue bonds – 36%
• Easy to monitor – 33%

They added that the two primary reasons their clients want individual bonds are for income (56%) and diversification (23%).

Advisors also believe individual bonds improve relationships and portfolios at the same time. Asked whether they agree or disagree with the following statements:

• 67% said using individual bonds improves client relationships;
• 63% believe individual bonds help hedge inflation;
• 60% believe individual bonds add alpha.

To help their clients invest in individual bonds, 82% of advisors are using bond ladder strategies. However, less than half (46%) say they have the tools needed to build ladders themselves.

“We are seeing the reconsideration of individual bonds,” said Nicholas Whiteley, InspereX Head of Fixed Income Technology. “Advisors are helping their clients to understand the timely opportunities that come with predictable income at rates that are more attractive than they have been in years, and in turn both client portfolios and client relationships are benefitting.”

Advisors and their clients should always discuss the risks of bond investing, including the credit risk of the issuer, interest rate risk, and liquidity risk. Bonds are intended to be buy-and-hold investments. Investors should consult with a tax adviser about the consequences of particular bonds.

Among the 32% of advisors who said they do not use individual bonds with clients, the top three reasons were:

• Clients don’t ask for them – 38%
• Managed products make my life easier – 33%
• Too time consuming to evaluate – 32%

Fixing the Fixed Income Market Experience for Advisors

Greater efficiency through technology and pricing transparency top the wish list of items advisors say could make the fixed income market work better. More specifically, the top five wish list responses from advisors were:

• Easier to use technology providing greater efficiency – 55%
• Pricing transparency – 42%
• Technology that allows me to drive performance and reduce risk – 33%
• Access to new issue bonds – 32%
• Better way to document best execution – 23%

When evaluating potential fixed income technology solutions, the advisors ranked the following characteristics in terms of importance:

1. Cost
2. Ease of implementation
3. Integration with their other systems
4. Access anywhere on any device
5. Functionality that works for them
6. Has the products they regularly use

“Overwhelmed by choice, uncertain about fixed income pricing transparency, and burdened by documentation requirements, advisors are eager for intuitive technologies that fit seamlessly into their workflows and let them cut to the trade,” Whiteley said. “They understand that improving efficiency can generate alpha by letting them do more of what they do best: helping clients meet their financial goals.”

About InspereX

InspereX is transforming how fixed income securities and market-linked products are accessed, evaluated, and traded. Home to the pioneering BondNav® platform – one of the first cloud-native bond aggregation platforms – InspereX provides financial advisors, institutional investors, issuers, and risk managers deep access to fixed income market data across asset classes, as well as industry-leading origination, distribution, and education in market-linked products. Focused on delivering true price transparency, liquidity, execution targeting price improvement, and the information advantage gained through data aggregation, InspereX inspires greater confidence through the power of technology.

The firm is a leading underwriter and distributor of securities to more than 1,500 broker-dealers, institutions, asset managers, RIAs, and banks. InspereX represents more than 400 issuing entities and has underwritten more than $670 billion in securities. The firm has seven trading desks and more than 200 employees with principal offices in Delray Beach, San Francisco, Chicago, and New York City.

Bond Risk Considerations

Credit risk

Bonds are subject to the credit risk of the issuer. If the issuer defaults on its obligations, some or all of your coupon payments and principal could be at risk. Additionally, changes to an issuer’s credit rating will generally affect the secondary market value of bonds.

Interest rate risk

When interest rates rise, bond prices typically fall; when interest rates decline, bond prices usually rise. Changes in interest rates may reduce or increase the market value of bonds. The longer the maturity of bonds, the greater the impact that changing interest rates can have on their price. If you plan to hold bonds until their maturity, the impact on the market value from changes in interest rates is not a concern.

Liquidity risk

While many broker-dealers maintain an active secondary market that may allow the option to resell bonds at prevailing market rates, there is no assurance that a secondary market will be maintained. If you sell bonds prior to maturity, you may receive more or less than your original investment.

Survivor’s Option limits

Bond issuers that provide Survivor’s Options may choose to limit the aggregate principal amount of notes that may be redeemed in any one calendar year under the Survivor’s Option terms. There may also be calendar year limits on the exercise of the Survivor’s Option on behalf of any one deceased owner. There may be a holding period before beneficiaries can exercise their Survivor’s Option, and there can be no assurance that exercise of the desired amount will be permitted in any single calendar year. Refer to the offering documents for details, if applicable.

Tax implications

When held to maturity, bonds incur no capital gain or loss on the original investment. Coupon payments are taxed as ordinary interest income. Tax consequences of bond features may depend on the particular terms. Before purchasing InterNotes, please consult with your tax advisor. You should also read the applicable tax risk disclosures in the offering documents when considering the purchase of bonds.

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