Long-Duration Corporates Will Pay Off When Fed Eases, Janus Henderson Says

Buying the bonds now is a good arb play amid talk of lower rates in 2024, the firm believes.


If the Federal Reserve reduces its benchmark interest rate next year, as many investors expect, then buying longer-duration corporate bonds now would be a smart move, according to Janus Henderson strategists.

“It would be hard to lose money by adding [long] duration” to a portfolio, advised Seth Meyer, head of fixed-income strategy at the investment firm, in a webcast Wednesday that offered Janus’ 2024 outlook.

Longer duration bonds, generally those with maturities far off in the future (as much as 10 years from issuance), are most affected by changes in interest rates. If a bond has a duration of eight years, then a one-percentage-point drop in rates would produce an 8% increase in the bond’s price.

In making such an arb play, Meyer added, “you have to be picky” and ensure that the bonds you add are backed by solid fundamentals such as strong balance sheets.

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At the moment, spreads of corporate paper to Treasurys are relatively narrow, with investment grade bonds yielding just 110 basis points (each point is one hundredth of a percentage point) over government obligations, down from 140 last year. Junk bonds are 380 bps over, compared with 540 last year.

Meyer noted that CCC bonds, the lowest junk rating before default, were the best-performing fixed-income category this year, a sign that investors were optimistic about them amid lingering forecasts of a recession next year. CCC bonds yield an average 14% annually, while BB bonds (the highest junk rating) are at 6.6%.

Investor interest in longer-term bonds has been piqued lately, observed Lara Castleton, U.S. head of portfolio construction and strategy at Janus, who moderated the webcast. She pointed to the iShares 20+ Year Treasury Bond exchange-traded fund, which tumbled all year until mid-October, when healthy economic reports quelled widespread recession fears—and since, the ETF has rallied 14.5%.

Janus is in the soft-landing camp for the economy, meaning it believes a recession will be avoided next year. Meyer acknowledged that the cost of capital is higher nowadays, given the Fed’s tightening campaign, but also cited the futures market’s wagering that the central bank will lower rates in 2024.

There will be plenty of corporate bonds to choose among, with S&P Global Ratings forecasting nonfinancial bonds issuance to grow 12% this year from last year’s volume and then slow down to 3% in 2024, from this year’s total.

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Mercer to Acquire Vanguard OCIO Business

Vanguard Institutional Advisory Services, its employees and clients will become part of Mercer next year.


Investment consultant Mercer will acquire Vanguard’s Institutional Advisory Services group, which provides OCIO services to institutional clients, both firms confirmed in a   The acquisition is expected to close in the first quarter of 2024.

“Vanguard’s differentiated investment philosophy, strength in the not-for-profit sector, and client-centric approach complements our global capabilities across OCIO and managing alternative asset classes,” said Marc Cordover, U.S. investments and retirement leader at Mercer.

Vanugard’s 120-employee team will transfer to Mercer upon closing of the deal. Vanguards OCIO business provides investment management services for non-profits and institutional investors in the United States.

Shekhar Mukherjee, a director at Clearwater Analytics, notes that one reason for the deal may have been  noted that among the reasons behind the deal maybe be that OCIO clients have been “getting more sophisticated over the years” when it comes to the investment mix on offer. While asset managers still offer their own funds for the investment strategies—often as the majority of investments—there is more demand for third-party options and varied investment strategies such as alternatives.

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“Clients want exposure beyond just funds and ETFs, as they’ve gotten less comfortable with that model over the years,” he says.

Vanguard Institutional Advisory Services reported having 1,162 full-discretion clients and $52.3 billion in full discretionary assets, according to data in the CIO OCIO survey, published in June.

Most of Vanguards OCIO clients will also be transferred to Mercer, which operates a larger OCIO business, according to the CIO survey in which the firm reported 1,962 full discretion clients and $275.1 billion in full discretion assets.

While Mercer’s OCIO business is larger, the combination could add significantly to the firm’s OCIO assets from endowments and foundations and from healthcare pools, which are categories where Vanguard has larger portfolios. If all the business moves over at the levels reported in CIO’s OCIO survey, Vanguard’s $23.5 billion endowment and foundation portfolio and $14.2 billion of healthcare pool assets would join Mercer’s $19.4 billion of endowment and foundation assets and $2.5 billion of healthcare pool assets.

“We are confident our OCIO clients will continue to enjoy high-quality investment solutions, ably stewarded by the mission-driven professionals who will continue to serve them,” said John James, managing director of Vanguard’s institutional investor group, in a statement. “With Mercer’s expertise, capabilities, and commitment to driving optimal client outcomes, we believe it is well positioned to help our OCIO clients navigate the evolving OCIO landscape.” 

The move comes shortly after Marsh McLennan announced that Mercer will get a new CEO and president in April 2024. In an October announcement, Pat Tomlinson was named president, with plans to take the role of CEO from Martine Ferland when she retires at the end of March.

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