Bonds: Total Market
(New York)
The bond market is a powder keg that may have only started to explode, says ING. “The bond market has been sitting on a powder keg since last week. Attitude towards duration among fixed income investors has grown cautious, to put it mildly”, says Padhraic Garvey, regional head of research for the Americas at ING. “In this context, we do not blame investors for exiting at the first sign of a sell-off”, he continued.
FINSUM: Investors are currently terrified about inflation and it is hitting Treasury yields and tech stocks squarely on the chin. Our opinion is these fears are overblown and this is a market overreaction, especially as it regards tech stocks. These stocks are losing despite the fact that underlying fundamentals strongly favor the growth of tech earnings.
(New York)
Inflation concerns are on the rise. The Fed has reacted with large unprecedented moves to the Covid-19 recession. The Biden administration is...View the full story on our partner Magnifi’s site
(New York)
The fixed income market used to be where you went for safety and steady income. Those days seem long ago, and fixed income is not just as likely as any other asset class to eb the riskiest and most volatile in your portfolio. Between COVID and the Fed, interest rates are extremely low, with yields low and bond price very high, and vulnerable. Some have been comparing the situation to Japan in the 1990s and beyond, but there is a huge difference that makes the US bond market much worse than Japan ever was—inflation. When Japan started its massive zero rate, ultra-low yield period, it was experiencing deflation, which meant there was still a positive real rate. But that is not true in the US today, as yields are actually well below real-world inflation, meaning genuinely negative real interest rates.
FINSUM: There is ultimately going to have to be a reckoning in the bond market, because real returns are not sustainable. That said, it does not seem like the Fed is going to let that happen any time soon.
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(New York)
This is a difficult time to be any kind of investor, but being one trying to get yields out of equities is particularly hard-bitten at the moment. Dividends are being cut left and right, so investors need to turn to other options, but much of fixed income looks very scary. That said “Quality yield is on sale”, according to a fund manager at Tocqueville Asset management who specializes in income investments. “Don’t ignore the rest of the capital structure”, says another fund manager at Socoro Asset Management. For instance, look for things like a JP Morgan Chase preferred security with a fixed coupon of 5% and yield-to-call of 7.72%, or Invesco’s Variable Rate Preferred ETF (VRP), yielding 4.85%.
FINSUM: These are good suggestions. For a yield that will really knock your socks off, take a look at the Virtus Private Credit Strategy ETF (VPC), which owns many BDCs and CEFs and has been beaten up in the selloff, but yields a whopping ~18% net of expenses.
(New York)
If anything is becoming clearer about coronavirus’ effects on the economy, it is that job losses are going to be staggering. But what will be the knock-on effects? One of the many looks likely to be a serious credit crunch. Without income flowing in, many borrowers are going to be late or default on payments, which means lenders will run short on money and everyday companies will not get their normal cash flow. Not only will this hurt earnings and weaken credit ratings and corporate solvency, but it will likely cause a serious decline in consumer credit scores that will have a lingering effect on credit for years.
FINSUM: Everyone seems to be trying to mitigate this threat. Banks are suspending mortgage payments, credit bureaus say they won’t report delinquency etc. This is unprecedented, but it remains to be seen how it plays out (and for how long).
(New York)
The bond market looks primed for a big correction, says a top asset manager. Bonds have been surging in price as yields fall because of fears over coronavirus, but they seem likely to have a sharp pullback once the news cycle focusing on the virus moves on. That is the argument coming out of asset manager WisdomTree. According to the firm’s head of Fixed Income Strategy, if we have a sharp “V” shaped recovery, then bonds might see yields jump sharply (and prices fall sharply).
FINSUM: WisdomTree made one other excellent point that is not as obvious. US companies are starting to seek alternative suppliers away from China. As this happens, there is likely to be a transitory pickup in inflation since prices are probably going to be higher from suppliers outside of China. Accordingly, bond markets might also react sharply to a rise in inflation.