Allocating with Assurance in Fixed Income: A Consideration of Circumstances for 2024

With so many fixed income options in the market, you may find yourself wondering which products make the most sense for you and your clients. Here at Harbor, we offer several solutions in the space, including ETFs and mutual funds. Below are a few considerations that are top of mind for fixed income investors entering 2024, as well as potential investment options to capitalize on these trends and macro circumstances.

For investors who believe that interest rates will remain higher for longer…

While the Fed’s historic rate increases may be at their peak, we do expect rates to be held higher for longer. This will place continued pressure on earnings and may lead to more defaults in certain areas of the market. We believe active management is critical at this juncture not only in what active managers identify as attractive investments, but what they avoid because of insights gleaned from their research. Research generated insights from both IR+M and BlueCove can play a valuable role in aiming to avoid some of these names/pockets of the market that may come under pressure (and/or default) from continued higher rates. Furthermore, given both IR+M and BlueCove’s size, they may have the ability to be nimbler in avoiding troubled pockets of the market relative to their larger peers. In our view, Harbor’s active fixed income offerings including the Harbor Core Plus Fund (HABDX), the Harbor Core Bond Fund (HACBX), the Harbor Scientific Alpha Income ETF (SIFI), and the Harbor Scientific Alpha High-Yield ETF (SIHY) all offer attractive solutions for these market circumstances.

For investors focused on total return, though interest rate movements and trajectory remain unclear…

Fixed income markets are highly sensitive to changes in interest rates. However, attempting to time these markets requires predicting future interest rate movements, which is notoriously difficult. For a potential solution to this predicament, we appreciate that IR+M’s duration neutral approach eliminates the need to focus on interest rate uncertainty. The firm instead focuses on bottom-up security selection to drive alpha with a quality bias. Harbor’s IR+M offerings include the Harbor Core Plus Fund (HABDX) and the Harbor Core Bond Fund (HACBX).

For investors that are risk averse…

Although fixed income investors may question why they should allocate to core fixed income now given they can safely earn comparable yields on T-bills, we find it important to note that short-term rates may not stay high for long enough to enjoy 5% T-bill yields beyond the next year or two. Moreover, we believe the compounding of spread interest within the securitized and corporate credit sectors provides a valuable source of return amidst overall interest rate volatility. With fixed income markets appearing increasingly complex and turbulent, we find that the Harbor Core Bond Fund (HACBX) and the Harbor Core Plus Fund (HABDX) offer active intermediate fixed income exposure with enhanced consistency, making them an attractive investment opportunity for those investors seeking quality risk-adjusted returns.

For investors that want to capitalize should spreads widen…

We find that when credit spreads widen and rates of defaults rise, you tend to get greater dispersion of opportunities. In our view, this is the sweet spot for our subadvisor BlueCove and the Harbor Scientific Alpha High-Yield ETF (SIHY). SIHY’s active approach affords it a nimbleness in aiming to achieve idiosyncratic alpha with superior stock selection in these uncertain economic environments, as well as downside hedge amidst potentially rising defaults.

For investors that question an investment in high yield in the current environment…

We think that investors are best served by allocating to the high yield asset class on a strategic, rather than tactical basis, and we believe that BlueCove is well positioned for potential choppiness in the high yield road ahead. Notably, the Harbor Scientific Alpha High-Yield ETF (SIHY) looks to position itself conservatively from a credit quality standpoint. While spread levels remain fairly tight at present for the high yield market, further deterioration of economic conditions could lead to a widening of high yield spreads in the future. As lower rated bonds tend to underperform during periods of spread widening, we think SIHY’s current positioning of underweighting to CCC and non-rated bonds positions it well to outperform peers in this scenario.

For investors that are looking for comparable yields to what the high yield market offers but with potentially lower volatility…

While the upside of high yield bond returns may be enticing, they also come with associated credit risk. For a fixed income investor seeking an improvement or complement to core bond strategies, we point to the Harbor Scientific Alpha Income ETF (SIFI). SIFI aims to achieve a comparable yield to high yield products in the market, though it looks to lessen the volatility associated with recognizing said yields via its active approach and diversification. SIFI could also serve as a replacement option for high yield investors that may be concerned about spread widening /default risk and are looking for more of a multisector bond offering that incorporates both investment grade and below investment grade securities, housed within an actively managed approach.

To learn more about Harbor’s lineup of active, fixed income solutions, please visit our website.

Important Information

Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Shares are bought and sold at market price not net asset value (NAV). Market price returns are based upon the closing composite market price and do not represent the returns you would receive if you traded shares at other times.

HABDX: There is no guarantee that the investment objective of the Fund will be achieved. Fixed income investments are affected by interest rate changes and the creditworthiness of the issues held by the Fund. As interest rates rise, the values of fixed income securities held by the Fund are likely to decrease and reduce the value of the Fund's portfolio. There may be a greater risk that the Fund could lose money due to prepayment and extension risks because the Fund invests, at times, in mortgage-related and/or asset backed securities.

HACBX: There is no guarantee that the investment objective of the Fund will be achieved. Fixed income investments are affected by interest rate changes and the creditworthiness of the issues held by the Fund. As interest rates rise, the values of fixed income securities held by the Fund are likely to decrease and reduce the value of the Fund's portfolio. There may be a greater risk that the Fund could lose money due to prepayment and extension risks because the Fund invests heavily at times in mortgage-related and/or asset backed securities.

SIHY: All investments involve risk including the possible loss of principal. Fixed income securities fluctuate in price in response to various factors, including changes in interest rates, changes in market conditions and issuer-specific events, and the value of your investment in the Fund may go down. There is a greater risk that the Funds will lose money because they invest in below- investment grade fixed income securities and unrated securities of similar credit quality (commonly referred to as “high-yield securities” or “junk bonds”). These securities are considered speculative because they have a higher risk of issuer default, are subject to greater price volatility and may be illiquid. Because the Funds may invest in securities of foreign issuers, an investment in the Funds is subject to special risks in addition to those of U.S. securities. These risks include heightened political and economic risks, greater volatility, currency fluctuations, higher transaction costs, delayed settlement, possible foreign controls on investment, possible sanctions by government bodies of other countries and less stringent investor protection and disclosure standards of foreign markets.

SIFI: All investments involve risk including the possible loss of principal. Fixed income securities fluctuate in price in response to various factors, including changes in interest rates, changes in market conditions and issuer-specific events, and the value of your investment in the Fund may go down. There is a greater risk that the Funds will lose money because they invest in below- investment grade fixed income securities and unrated securities of similar credit quality (commonly referred to as “high-yield securities” or “junk bonds”). These securities are considered speculative because they have a higher risk of issuer default, are subject to greater price volatility and may be illiquid. Because the Funds may invest in securities of foreign issuers, an investment in the Funds is subject to special risks in addition to those of U.S. securities. These risks include heightened political and economic risks, greater volatility, currency fluctuations, higher transaction costs, delayed settlement, possible foreign controls on investment, possible sanctions by government bodies of other countries and less stringent investor protection and disclosure standards of foreign markets.

Diversification does not assure a profit or protect against loss in a declining market.

Alpha refers to excess returns earned on an investment above the benchmark return when adjusted for risk.

A credit spread reflects the difference in yield between a treasury and corporate bond of the same maturity.

Default risk refers to the likelihood that a borrower won't be able to make their required debt payments to a lender.

Duration measures a bond’s or fixed income portfolio’s price sensitivity to interest rate changes.

Idiosyncratic alpha is the portion of a strategy’s return not explained by the market and risk factors.

Yield is a return measure for an investment over a set period of time, expressed as a percentage.

The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals. They may not be reflective of current opinions, are subject to change without prior notice, should not be considered investment advice or a recommendation to purchase a particular security.

BlueCove is a third-party subadvisor to the Harbor Scientific Alpha Income ETF (SIFI) and the Harbor Scientific Alpha High-Yield ETF (SIHY).

IR+M is an independent subadvisor to the Harbor Core Plus Fund (HABDX) and the Harbor Core Bond Fund (HACBX).

3286493