(New York)

One of the most underappreciated areas of the bond market is in mortgage-backed securities. Anyone familiar with the Financial Crisis will instantly know why. However, the asset class itself offers many attractive advantages compared to other bonds. There are three main points of appeal: higher yields, liquidity, and low correlation to risk assets. MBS ETFs average 2.79% yields (much higher than Treasuries), have much greater liquidity than corporate bonds, and have the lowest correlation to risk assets of any fixed income instrument.

FINSUM: If you can get of the trauma that the acronym caused, MBS can be a very good asset class for many different market environments.

(Washington)

Here is an eye-opener for investors: one of the biggest market reactions to the midterms is likely to be in munis. In particular, yields on munis are expected to fall is the Democrats take the House, which would result in a split Congress. The reason why is that such an outcome would likely limit the further possible damage that could be wrought by Republican tax proposals. However, since the market is anticipating this outcome, if Republicans do maintain their hold on the House and Senate, then yields could rise sharply. The call on the moves comes from Barclays.

FINSUM: The most likely outcome right now seems to be a blue House and a Red Senate, which would mean smooth sailing and likely gains for munis.

(New York)

Wall Street is getting behind the stock market in a way that is atypical for the current environment. Following a big fall in stocks, banks and analysts usually get shy about calling a rally and generally stay neutral or call for further losses. However, following the best two consecutive trading days since February, they are getting behind stocks with unusual vigor. For instance, JP Morgan’s all-world analyst said that the “rolling bear market” might turn into a “rolling squeeze higher” and that “the potential for a violent upside rally is substantial”.

FINSUM: We are not as optimistic as Wall Street, but certainly don’t feel gloomy about the market given the strength of earnings and the economy.

(New York)

It is no secret, but new data is out showing just how much advisors don’t like the SEC’s new best interest rule. While there has been strong pushback about aspects of the rule, including its governance of the use of titles, there hadn’t been concrete data about how advisors felt about it. Well, now there is. A new survey from Fidelity shows that two-thirds of advisors say that the rule will either have a negative impact or won’t help. Only one third think it will have a positive impact. Interestingly, only 73% were actually aware of the SEC proposals in the first place.

FINSUM: The SEC rule is confusing and not well conceived. And when you combine with the updated DOL rule that is coming out in 2019, the new regulations could turn into a real headache.

(New York)

The market seems to have finally regained its footing after a very turbulent couple of weeks. This selloff felt different than any in recent memory and serious damage to the market’s psyche seems to have been done. But what might it say about the wider economy? The answer is little, according to the Wall Street Journal. The selloff will probably be just that, a market fall. In reality, tech companies, which led the losses, reported very solid earnings, with margins expanding very well. Little can be drawn from the results that might show the economy is in trouble.

FINSUM: The only aspect of this selloff we are somewhat worried about is how it might impact consumer confidence and spending this holiday season. However, so long as the market stays strong this month, we expect the impact to fade.

(New York)

One of the big worries in the Treasury market is that foreign demand is waning for Treasury bonds at the same time as supply is surging. This is leading many to stress that US government bond prices could be in for a big fall. However, Bloomberg says that won’t happen. The logic just isn’t there, and neither is the data to back it. Inflation and rates are rising, and so is the Dollar, making the bonds more attractive to hold. Further, US yields and credit-worthiness are looking increasingly positive given the bond market turmoil in Europe.

FINSUM: Because the Dollar is still the dominant world currency, there is a lot of built-in demand for Treasuries. And given the state of US yields versus the rest of the developed world, we don’t think foreign demand is going to shrink.

(New York)

Inflation has been ticking higher, but it has not been high enough to cause real concerns. Despite this, the Fed has still been very hawkish, hiking rates several times. Well, that mild inflation may be about to change. Anecdotal evidence of corporate behavior shows that companies are increasingly passing along costs to consumers. In everything from soda to bleach to cookies, companies have been raising prices. Explaining the moves, the CEO of Mondelez says “The consumer environment is strong”. Prices across the supply chain have been rising, helping to drive higher pricing.

FINSUM: Consumer sentiment and spending is strong and this seems like the ideal environment in which to raise prices. Thus we think headline inflation is going to start to rise.

(New York)

Financial advisors appear to not give a hoot about the forthcoming SEC Best Interest rule. Fatigue from the endless on-again-off-again DOL saga seems to have taken hold of the industry. A new survey by Fidelity found that 40% of advisors says that even though they are aware of the proposals, they are currently taking no action. A further 78% of advisors say they will need help in assessing and evaluating the proposals.

FINSUM: While there is definitely some fatigue, the reality is that most advisors did a lot of preparation for the fiduciary rule, and thus they think they are in a good position for the forthcoming SEC rule.

(New York)

Investors need to face reality (not that they aren’t), this Fed is more hawkish than any since the Crisis, and despite the market turmoil there will be yet another hike before the end of the year. Rates will keep rising so long as the economy stays strong. That means investors need to prepare. They have mostly done so by fleeing bond funds, but that may not be wise, as there are some very attractive funds that can help offset interest rate risk. For instance, check out the ProShares Investment Grade—Intr Rt Hdgd (IGHG) and the iShares Interest Rate Hedged Corp Bd ETF (LQDH). IGHG is particularly interesting because while both funds go long corporate bonds and short treasuries to produce zero duration, IGHG holds less BBB rated bonds and has a higher quality portfolio, all of which has let the fund appreciate this year even as rates rose strongly.

FINSUM: There are some very solid and creative bond funds out there to help offset rate risk while still earning decent yields. Given where equities are right now, these seem like good buys.

(New York)

For many years the prevailing mantra in the equity market had always been “buy the dip”. Every time the market fell, investors bought the dip and encouraged others to do so. However, that approach seems to have disappeared in the carnage of the last couple of weeks. Whereas falls used to be followed by rallies that pushed the market higher, the last few weeks has been characterized by more sustained losses with shallower rallies. Nordea Asset Management’s chief strategist sums up the mood change well, saying “We’ve seen a shift from buying on dips to selling into strength … We’re increasingly moving from glass half full to glass half empty; that’s the narrative here”.

FINSUM: We think that view sums it up well. While we do believe stocks won’t enter a bear market right now because earnings and the economy are solid, we sense that something in investors’ psyches has fundamentally changed.