Advisors fear slow growth, see value in high-quality bonds: PGIM study

Treasuries rank as the most attractive fixed-income sector but advisor urges clients to diversify should economic environment suddenly change.

Uncle Sam is not the only one telling investors to buy U.S. bonds. Financial advisors are too.

PGIM Investments’ quarterly survey of advisors — conducted just before the banking turmoil in March and again in May — shows that financial advisors ranked Treasuries, municipal bonds and investment-grade corporate bonds as the most attractive fixed-income sectors in both the first and second quarters of 2023.

The results were a significant turnaround from last year, when advisors ranked Treasuries as one of the least attractive sectors.

The study also showed the two sectors gaining significant ground in the minds of advisors between the first and second quarters this year were agency mortgage-backed securities and asset-backed securities. The attractiveness of the former rose from 24% in the first quarter to 34% in the second quarter, while the latter rose from 12% to 22% over that time, according to PGIM.

“When interest rates were zero, investors looking to make any type of return in bonds had to stretch for yield. Now that interest rates are higher, investors seem to have remembered that equities are the best place to get ‘equity-like’ returns while high-quality bonds, at today’s interest rates, represent a reasonable hedge,” said Jon Swanburg, president of TSA Wealth Management.

Dean Tsantes, certified financial planner with VLP Financial advisors, said the juicy yields on Treasuries right now are making them an attractive investment depending on the client’s situation and time horizon. But he advises clients to diversify across fixed-income classes should the economic environment suddenly change.

“As soon as interest rates begin to drop and inflation eases, investment-grade bonds which have faced headwinds will be a great place to be, and I wouldn’t be surprised if we see double-digit returns in those areas,” Tsantes said.

As for what is keeping them up at night, the 379 advisors surveyed in the second quarter were most worried about an economic slowdown (56%), followed by inflation uncertainty (53%) and stock market volatility (44%).

Looking three years down the road, those worries change. According to the PGIM survey, at that time, 59% of advisors expect geopolitical events will be their biggest concern when managing portfolios, followed by regulatory changes at 44% and then stock market volatility and low returns tied at 36%.

The study showed tax management is also on advisors’ future radar, with 32% anticipating it will be a top concern in three years compared to only 14% today.

Finally, half of advisors said they have no plans to change the equity and fixed-income allocations in their clients’ portfolios, while just over half plan to stay the course with their clients’ alternative assets.