Janus Henderson Short Duration Income ETF Q2 2024 Commentary

Performance – USD (%)

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Investment environment

• Global bonds slipped during the quarter, weighed down by non-U.S. issuance. Sovereigns faced the largest headwinds. Corporates held up better with the difference between the yields on investment-grade issuance and those of their risk-free benchmarks only modestly widening.
• Treasury yields rose in the U.S., with that of the 10-year note climbing 20 basis points (bps) to 4.40% by period end. Still, U.S. Treasuries generated positive returns, given yields are much closer to historical averages.
• Bonds lost ground mid-period as persistent U.S. inflation caused investors to assume the Federal Reserve (Fed) would delay rate cuts, but a resumption of falling prices enabled many market segments to recapture lost ground.

Portfolio review

The Fund seeks to provide a steady income stream with capital preservation across various market cycles. The Fund seeks to consistently outperform its benchmark by a moderate amount through various market cycles, while at the same time providing low volatility.

The Fund seeks to generate consistent returns by focusing on higher-quality, shorter-dated credits that tend to offer attractive income generation – or carry – as they near maturity. Contributing most to returns was the carry earned on the Fund’s core of shorter-dated corporate credits, along with a decline in rates in jurisdictions where the strategy had material exposure. Given market volatility caused by uneven economic growth, diverging inflation trajectories, and geopolitical concerns, we deployed hedges with the aim of dampening the impact of rate swings. For the period, these positions generated positive returns.

The degree to which restrictive policy has weighed on different economies drove our duration management during the period. With Canada’s employment situation deteriorating and inflation likely returning to the Bank of Canada’s target more quickly than what may occur in the U.S., we extended duration exposure to the country in expectation of additional rate cuts. Despite our negative outlook toward European growth, we reduced duration to the currency bloc as we believe much of the future rate reductions have been priced in. Earlier positioning in German duration benefited from a flight to safety in the wake of the first round of French parliamentary elections. With that behind markets, we tactically reduced duration in Germany. While this repositioning left us with lower U.S. duration exposure, we still maintain the view that U.S. economic conditions will soon allow the Fed to initiate its cutting cycle. In aggregate, we reduced portfolio duration from 1.25 years to 1 year during the period.

Manager outlook

We believe mixed data validates the Fed’s wait-and-see approach. Chairman Powell understands the imperative of maintaining the central bank’s credibility, and he’s been quick to reiterate the Fed’s litmus test of cutting policy: Either gaining greater confidence that inflation is moving sustainably toward its 2.0% target or the labor market unexpectedly weakening. Neither have been met.

We believe investors can take some comfort in a scenario evolving in a manner we would expect under restrictive conditions eventually transitioning to easing but without sending the economy into recession. This would be favorable to shorter-dated bonds in anticipation of rate cuts and investment-grade credits that would benefit from an extended cycle. Valuations matter as well, and investors should recognize what’s priced in across asset classes. A Goldilocks scenario is welcome, but it would be wise to remember how that fairy tale ends.

The U.S. economy appears less rate sensitive than in cycles past, and hybrid work and the gig economy – let alone technological efficiencies from sources such as artificial intelligence – may be impacting the labor market in ways not yet fully understood by economists.

Uncharted territory understandably leads to jittery markets. We are likely on the cusp of an easing cycle but are not there yet. Moderating inflation and an observable – but not alarming – slowing of the labor market means that a soft landing is still on the table. This, in our view, should be supportive of the riskier assets more dependent upon the extension of the economic cycle.

Periods of falling rates naturally lead to lower yields along the front end of the Treasuries curve. While this should be favorable for fixed income as investors exit cash in favor of bonds, we need to recognize that some pockets of the market have already anticipated this. Again, valuations are important. Buying into risk solely in anticipation of a Goldilocks scenario is not enough. With valuations high, any negative economic surprise would have immediate repercussions across markets, especially in more speculative areas that seem to price in better, if not best, case scenarios.

Portfolio

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