(New York)

Many are worried the bond market turmoil will grow worse. Bonds sold off fiercely last week, and the US jobs report, while not as great as expected, still reinforced the fact that rates are headed higher as the economy strengthens. However, many economists and analysts think the rise in yields will abate or even reverse in the coming weeks. Yields are at 3.23% on the ten-year Treasury now, but the average forecast of 58 economists surveyed says they will end the year at 3.08%. Even the worst bond market bears, like Goldman Sachs, think yields will only rise gradually to finish the year at 3.4%.

FINSUM: Our personal view is that yields had their big move upward and will probably now trade in a band at least until the next Fed meeting.

(San Francisco)

Want to find a good test for whether the Fed has hiked rates too far? Look no further than everyone’s favorite, the FANG stocks. There is an increasing risk that the Fed may get very hawkish with its rate hikes, and if that happens, FANGs will show the pain first, says Julius Baer & Co. Baer thinks that the S&P 500 might sink 20% on the back of rate hikes before the Fed starts to moderate its action. It believes FANGs will feel the brunt of the losses. The NYSE FANG+ index peaked three months ago and has fallen 13% since June.

FINSUM: We do not disagree that rate hikes could cause market losses, but we don’t know why FANGs would feel the most heat other than the simple fact that they have gained the most.

(New York)

Is this a watershed moment for the equity market or just another small blip in the exorable march higher? That is the question investors are asking themselves this week after the losses of the last few trading days which occurred as a response to quickly rising yields. Many analysts and Wall Street veterans think that heavy pressure will be on equity prices as yields move towards 3.5%. According to BNY Mellon, as yield move higher is hurts “investors’ ability to call this stock market reasonably valued”. Some investors are more sanguine, believing the market can handle higher rates.

FINSUM: One of the biggest signs here does not have to do with yields themselves. Rather, some big money managers are admitting that they are rotating some money out of stocks and into bonds to reap the gains of higher yields. That will likely be the biggest challenge for stocks.

(New York)

ETFs are a product that has been growing at breakneck speed. AUM in the product is approaching $4 tn, which is astonishing given that it has really only taken a decade to get there, but still quite a bit smaller than the $16 tn in mutual funds. Experts say that the ETF market is going to increasingly resemble the mutual fund market as offerings diversify into smart beta, thematic ETFs, customizable ETFs, and fixed income. The last area—fixed income—is where creative indexing makes the most sense, as doing so can account for the common weighting issues that are much riskier in bonds than in equities (you don’t want your largest holding to be the issuer with the most debt).

FINSUM: The logic for fixed income ETFs is very strong, especially given how illiquid and restrictive buying bonds directly is. However, smart beta and other active ETFs (which are more expensive) don’t really have a big leg up on experienced mutual funds.

(New York)

Investors need to be careful, real estate looks likely to take a pounding in the coming months. While all the focus on the big jump in yields has been on how it has impacted bonds and stocks, one of the big risk areas is real estate. Unlike other parts of the economy and markets, real estate has been teetering for some time, with months of weak performance. REITs and real estate stocks have been selling off strongly over the last couple of days and the reason is clear—the last thing the already weak housing market needs is higher borrowing costs.

FINSUM: We think the move higher in rates and yields could spell a significant downturn for real estate. Prices are so high and demand is already starting to dry up, so higher yields may have a further dampening effect.