The move toward the automation of a greater percentage of our lives — think the Amazon Echo's Alexa — has a parallel in the investing world.
Consider this trend in light of the fourth quarter of 2016, the worst quarter for the broad U.S. bond market since 1981. After a nearly 100-basis-point rise in Treasury yields resulting in a nearly 3% decline for the quarter, investors are faced with new opportunities and challenges. Between rising expectations of growth and inflation, the broad market yields ended 2016 at their highest level (2.6%) in five years, presenting an attractive investment environment. At the same time, benchmark duration has risen to the highest levels (5.9 years) since its inception in 1973 and 30% above the level 10 years ago (4.5 years), which presents new challenges to fixed-income investors.
Against this duration and yield backdrop, and with the growing trend of automation, we contemplate how the growth of passive investing has affected not just the investors choosing a passive approach, but the overall U.S. fixed-income landscape. In observing this trend, examining both index construction and the issuance of securities, we find Treasuries are the fixed-income sector most impacted by the growth of passive investing.