Janus Henderson's Short Duration Funds: Q2 2024 Performance and Outlook

Janus Henderson Short Duration Income ETF Q2 2024 Commentary

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. 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.

Janus Henderson Short Duration Flexible Bond Fund Q2 2024 Commentary

Recent strong demand for fixed income could continue and potentially accelerate once the Federal Reserve (Fed) starts cutting rates, as investors aim to lock in yields and diversification benefits. Short Duration Flexible Bond Fund Performance - USD (%) (as of 06/30/24) The U.S. short-term fixed income market posted a positive return for the quarter, with the Bloomberg 1-3 Year US Government/Credit Index returning 0.95%. Shorter maturity corporates and securitized credit sectors outperformed comparable-maturity Treasuries. A couple of sticky inflation prints and continued economic resilience drove yields higher early in the quarter, as investors were forced to reconsider the expected pace of rate cuts forecasted for 2024. In the first half of the quarter, yields retraced their earlier losses as inflation returned to its downward trend, and the Fed continued to signal that they would start cutting rates in 2024. While jobs growth remained healthy, other economic data showed signs that the labor market is coming back into better balance and that economic growth is cooling. The yield on the U.S. 2-year Treasury (US2Y) ended the quarter at 4.75% relative to 4.62% at the end of March. Short-duration corporate investment-grade credit spreads widened marginally to 69 basis points (bps), while short-duration high-yield credit spreads ended the quarter slightly wider at 330 bps. We strive to generate moderate income from credit spread sectors while limiting drawdowns. We seek to do this by constructing the portfolio with credit risk and a modest amount of interest rate risk over the cycle. Our outperformance during the quarter was driven by our sector allocation decisions. Specifically, our overweight allocations to securitized credit and high-yield corporates contributed, as did security selection within investment-grade corporates. Despite corporate spreads widening slightly during the quarter, they remain near their historical tight levels - a sign that the corporate credit market has firmly embraced the soft landing. High yield outperformed investment-grade corporates and Treasuries on the back of strong fundamentals and favorable demand-supply dynamics. We increased our allocation to high yield during the quarter, as we were able to identify attractively priced assets in the new issue market. Incoming economic data, earnings, and strong technicals continue to support a favorable outlook for the sector. Our overweight to securitized credit drove our outperformance, and we have maintained that exposure. Notably, non-agency mortgages, asset-backed securities, and commercial mortgage-backed securities were the main contributing sub-sectors. With respect to yield curve positioning, we entered the period with a modest duration overweight and actively managed duration throughout the quarter. We closed out the period with a small duration overweight, as we believe rates are likely to fall in 2024 due to declining inflation. We also like the defensive characteristics of higher-duration exposure in the event the economy cools more quickly than expected. Thematically, growth in technology sectors fueled by artificial intelligence has driven strong demand for data center infrastructure and semiconductor manufacturing facilities. We have strategically acquired asset-backed securities, commercial mortgage-backed securities, and corporate bonds to gain exposure to these sectors, and we continue to seek out attractive investment opportunities in the space. As we look toward the latter half of 2024, market participants are grappling with questions of when and by how much the Fed will cut rates. The central bank remains committed to its data-dependent stance, and as a result, rates markets continue to fluctuate with each relevant data release. Presently, expectations are for one to two rate cuts in 2024. While economic growth, jobs growth, and corporate earnings have been robust, we are starting to see some softening in the economy and the labor market. We do not believe this is cause for investor concern. Rather, we see the slowing of the economy as the key to bringing inflation back to target, ultimately unlocking rate cuts. Simply put, the economy appears to be slowly slowing but not stalling. We still believe we are at the beginning of a Fed rate-cutting cycle. While the start date and cadence may be open questions, the fact that the Fed is shifting cycles is positive for fixed income markets in the long run, both from a returns and a diversification perspective. We acknowledge that corporate spreads are tight versus historical metrics, but the favorable macroeconomic environment, coupled with strong technicals and fundamentals, continues to support these valuation levels. We are closely monitoring valuations in light of the economic landscape and are ready to adjust as required should conditions change. Additionally, we seek to find attractive opportunities in the primary issue market and in securitized credit sectors, which look cheap versus corporates on a relative value basis. Overall, we favor an overweight to both credit spread risk and interest rate risk, as corporates and consumers remain largely resilient and the Fed readies itself for rate cuts. We expect that the recent strong demand for the fixed income asset class could continue and potentially accelerate once the Fed starts cutting rates, as investors aim to lock in attractive yields and benefit from the diversification that bonds may bring to multi-asset portfolios. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.