The past three-plus years have been a whirlwind for financial advisors and anybody who works in the fixed-income market. The 10-year Treasury yield was about 0.5% in Q3 of 2020, as the zero interest rate policy set in place by central banks around the world was in full swing. Consumers enjoyed low borrowing costs — homeowners pounced on the chance to lock in mortgages under 4% later that year and through the next. The inflation genie was soon to burst out of the bottle, though. 

A Bond Bear Market Lookback

Care of excess stimulus from both monetary and fiscal authorities, wholesale, and consumer-level prices began to tick up in 2021. The thing was, though, that the bond market sniffed it out first. The 10-year rate actually bottomed out on a closing basis in August 2020 at 0.515%, just about matching the nadir from March 2020 during the depths of the Covid-19 panic period. 

Yields marched higher as bond investors saw their principal values drop. Of course, due to fixed-income mechanics, just a modest advance in rates had a massive impact on a bond’s market value. So, the jump from 0.515% in early August 2020 to a short-term peak of 1.75% by the end of 2021’s first quarter was particularly harmful to those with conservative allocations (heavy in bonds, light in stocks) — a medium-duration portfolio dropped about 8% as the S&P 500 rose.

Stocks Up, Bonds Down in 2021

The 10-year yield would go on to range between about 1.2% and 2% for much of the following 12 months. The S&P 500, of course, topped out in the first few trading days of 2022. It was at that time, nearly two years ago, when stocks and bonds began trading in lockstep. Fears of higher inflation would lead to the reality that the Federal Reserve would be forced to raise interest rates. It turned out that the Fed’s mission to tame a 40-year high in the rate of consumer price increases would be its fastest credit-tightening cycle since 1980. 

Equities and Fixed Income Suffer in Tandem

Investors “diversified” in traditional assets like stocks and bonds were left holding the bag in the sense that there was no actual diversification. The stock-bond correlation reached its highest mark since the mid-1990s, and the best advice out there seemed to be, “Oh, just hold your bonds to maturity, and you’ll be fine.” Stocks went on to reach a low in October 2022, while Treasury rates to this day just seem to creep higher amid a surprisingly strong economic backdrop. 

Higher Real Yields, But Risks Linger

Now, all investors, not just retirees, can earn 5% or more in short-term bond funds with low credit risk, and even secure Treasury Inflation-Protected Securities (TIPS) yields around 2% on parts of the rate curve. What’s not to love, right? Still, bond market volatility remains extreme (you can check out the MOVE Index, which is like the Treasury market’s VIX — it has been above 100 all this year).

Study: Structured Notes Have Appeal — Thanks to Technology and Increased Education

The past three years have been some of the wildest we’ve seen in some time. It has also been a roller-coaster ride for Halo Investing — Structured Notes were in high demand during much of the low interest rate era, both at home and abroad. The market remains in growth mode, now nearing $4 trillion worldwide. Still, some pundits have called into question the utility of Structured Notes now that investors can capture what appear to be decent yields while taking calculated risk. 

More Advisors Adding Notes

It turns out that there are broader tailwinds for Structured Notes today that go beyond interest rate fluctuations. According to a report by Cerulli Associates, Structured Notes are expected to grow over the next year. 

As it stands, just 22% of advisors use them, but an additional 8% plan to incorporate notes into their clients’ financial plans. While Structured Notes have historically been seen as illiquid and costly products to own, Halo’s award-winning marketplace is changing this. Our platform works like an exchange, bringing together issuers and other buyers and sellers to foster price transparency that brings down costs. 

An Emphasis on Everyday Investors

The Cerulli report underscored the changing landscape for Structured Notes. The asset vehicle used to be reserved for the ultra-wealthy and institutional investors, but technology and innovation now work to the retail investor’s benefit. Financial advisors can team with Halo to bring enhanced yields, reduced drawdowns compared to traditional equity investments, and defined-outcome payouts. 

We like to think of notes as the “alternative to alternatives” in that you still get exposure to stock and bond indexes, but you do so in a risk-conscious way. Structured Notes also complement an existing portfolio to help dampen overall volatility — it’s not a wholesale change that requires a leap of faith. Notes are a tool to personalize financial outcomes and may help relieve money anxiety for retail investors who may not be able to stomach much more bond market volatility.

Managing Risk Using Notes

With almost all advisors planning to allocate capital to alternatives in the coming year, per Cerulli’s survey, the increased accessibility of Structured Notes is sure to promote more demand and perhaps new entrants into the note-issuance space. More players and competition mean new strategies with liquidity and continued cost compression in our view. Structured Notes, in addition to sporting high yields and enhanced market upside participation, are used to tailor strategies with unique terms based on specific client situations.

Structured Note Strategies 

Indeed, a personalized plan is one that clients are generally better able to stick with during both bull and bear markets, so there’s a behavioral component. Much ink is spilled on how nervous investors tend to panic at the very worst moment, selling at low points and failing to get back into the market. Another major risk, however, is seen during bull market fervor when the fear of missing out (the FOMO effect) causes ordinarily calm people to do weird and dangerous things with their money. 

A tailored plan for clients can help mitigate this risk that advisors see play out time and again. Simply adding a growth note to pair with a long equity sleeve and an income note to buttress a bond position may be able to help work behavioral wonders. Halo has also detailed our Equity Repair Strategy, which may help investors recover losses more quickly compared to owning a plain index fund, along with offering a level of downside protection.

Learn the Risks & Benefits, Become a Better Investor

Something our team focuses on is education. We want advisors to be empowered with a firm understanding of both the benefits and risks of using Structured Notes, so they can thoroughly explain strategies to their clients. A key appeal of notes is that they are really nothing new, but simply a different vehicle for owning stocks, bonds, or other asset classes (depending on the underlying index/asset). More education, pioneered by Halo, has helped the market expand, removing the previously opaque nature of the space.

The Bottom Line

The past three years have featured volatility in both the stock and bond markets. While the VIX has retreated to complacent levels, Treasury volatility remains high. What’s more, stocks and bonds continue to move together, frustrating investors seeking diversification and safety. Structured Notes, once unloved by financial advisors due to the vehicle’s illiquidity and previous emphasis on helping only ultra-high-net-worth investors, are growing in popularity. More advisors look to include them in client portfolios to complement financial plans. Cerulli Associates predicts growth in the Structured Note market and encourages today’s advisors to consider adding them to their investment-offering arsenal.

An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Please see our Halo Disclosure Page for important disclosures.