(New York)
This is a day where investors need to take a deep breath. Markets are plunging, the yield curve just inverted, and there are major fears about the durability of the US-China “truce”. One thing to take heart in is that even though they are good predictors, a yield curve inversion doesn’t mean everything. It is important to note that it is the two and five-year Treasuries that have inverted, not the two and ten, which could mean this is just a temporary kink. For instance, in 1998, this pair turned negative without the rest of the curve following suit.
FINSUM: On top of the last point there, remember that inversions don’t cause recessions, they are just the market predicting slower long-term growth. That said, they seem to create self-fulfilling prophecies.
(New York)
The credit market taught investors a very good lesson in the Crisis (not that many of them were paid attention to). One of those lessons was that the first signs of weakness in the market should be taken seriously, as they can be indicative of a pending meltdown. This occurred in 2007 before the cataclysm in 2008. It appears to be happening again now, as both US and European credit marks are showing some fault lines. For instance, the downgrade of GE is seen as a sign of weakness very similar to what occurred with Ford and GM in 2005.
FINSUM: There has been an extraordinary credit boom since the Crisis and there are bound to be consequences. The question is what the extent of those consequences will be. The market is starting to feel a bit like musical chairs.
(New York)
Here is an interesting fact for investors—municipal bonds tend to hold up well during periods of rising rates. The underlying tax benefits of the bonds mean their demand is well insulated even in such periods. The question is where to commit capital. Well, year-end tax loss selling is creating some interesting opportunities in closed end muni funds, says BlackRock. Some funds are selling at significant discounts to the NAVs, sometimes 10% or more. These funds tend to bounce back in the new year, which is called the “January effect”. The discount to NAV allows one to gain even if the prices of the underlying assets don’t budge.
FINSUM: Closed end muni funds look like a great place for some bargaining hunting until the end of the year.
(New York)
This is a tricky environment for income investing. On the one hand, rising rates generally mean better yields, but at the same time, the chance of rate-driven losses is high. What if investors wanted to get safe 5% yields? Doing so is a little bit tricky and requires a blend of riskier credit and a mix of durations. However, investors can get pretty close with some individual ETFs. For instance, BlackRock’s iBoxx $ Investment Grade Bond ETF yields 4.39% and has shorter dated maturities with comparable credit quality to other funds.
FINSUM: This seems like a good choice, but there are also a number of rate hedged ETFs that have similar yields and almost no interest rate risk.
(New York)
Those worried about rate hikes will be happy to hear this news. Ever-hawkish Jerome Powell is finally starting to sound just a bit more dovish. Powell says the economy is strong, but could face “headwinds”. He says the Fed is discussing how much and how fast to raise rates and acknowledged that the Fed’s actions could inhibit the economy. He said the Fed’s goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low”.
FINSUM: It is good to hear some public consideration that rates might get in the way of the economy. While we would not exactly say this is dovish, it is certainly less aggressive than previously.
(New York)
With all the volatility of the last month, and midterms, less focus has been on one of the most ominous of economic signs—the yield curve. Well, Goldman Sachs has just weighed in, warning investors that a yield curve inversion is looming. Goldman went further than to say that 2-years might be flat or overtake 10-years, the bank said that spreads between 2- and 30-year bonds would fall to zero. To put that call into perspective, it would be a narrowing of 50 basis points versus now. Goldman highlighted the move in its top themes to watch for 2019.
FINSUM: We have to give Goldman Sachs a little credit here as they have been consistently hawkish about rates for at least a year and are sticking to it. We tend to agree with this view.
(New York)
One of the safe bets during bouts of volatility since the Financial Crisis has been to pile into Treasury bonds anytime things got tough. Every time stocks dipped, the bonds tended to rally strongly and became a safe haven. However, since the recent downturn in equities, this correlation has ceased. Even amidst stock and oil’s plunges recently, Treasuries have basically remained flat, giving no comfort to investors.
FINSUM: The big difference this time around is that the volatility is coming during a period of rising rates, which means Treasury bonds are not as safe a bet as in the past several years.
(New York)
Everyone is watching the BBB bond market with a very close eye. The bottom fringe of the investment grade market, it saw an extraordinary jump in issuance over the last few years. Now, with rates rising, it looks very vulnerable. However, all that suspicion hasn’t amounted to much as investors have kept the area afloat. Ratings agencies and the IMF have both warned about the startling growth of BBB issuance, but so far, the sector is holding up.
FINSUM: Don’t be fooled. There is a massive amount of BBB debt and when a recession finally arrives alongside much higher rates, there seems bound to be a reckoning. That said, there are pockets of the market, like utilities credits, that seem like they will hold up better.
(New York)
There are a lot of investors out there worried about rates moving higher and bond prices falling as a result. Treasury yields have moved much higher over the last year, which has spooked investors. All that said, one fund manager thinks investors shouldn’t fret too much. The reason why is that markets likely have already priced in rate hikes in, so losses shouldn’t be much. Furthermore, we have actually entered a more normal yield environment, where one can earn meaningful yields on shorter-term credits that don’t have much interest rate risk.
FINSUM: This article raises a good point about the current yield environment. While rate driven losses are worrying, we have finally entered an environment where one can earn comfortable yields on interest rate hedged portfolios.
(New York)
Here is something no one was calling for before the election—the yield curve has has flattened considerably since the midterm results. The spread between two- and ten-year Treasuries got as low as 25 basis points. The market thinks the US deficit may be tighter than in an all-Republican scenario, which has sparked a rally in ten-years.
FINSUM: A flattening yield curve on its own does not necessarily indicate recession, but if it does invert, look out, as that is one of the most reliable indicators of a looming slowdown.
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(New York)
Almost all of the market articles regarding the results of the midterms have been about stocks, including which sectors might thrive etc. But the real winner might be the bond market. Treasury yields have fallen and spreads between short and longer term bonds have tightened. The reason why is that traders see the forthcoming US budget as more conservative now that Congress is split. In particular, the market thinks there won’t be a big surge in infrastructure spending, and Treasury bond issuance will probably be tighter, both of which have conspired to boost prices.
FINSUM: It is quite odd to think that the election of a Democrat majority to the House would make the market expect more conservative fiscal policy, but the reality is that a divided Congress will probably be less fiscally loose because of gridlock.
(Washington)
Investors can breathe a sigh of relief, but only for a moment, as it looks unlikely that the Fed will hike again in its next meeting this week. The Fed will not be releasing updated projections after this meeting. That said, improvements in the labor market recently make it likely that the central bank will hike rates at its meeting next month. The Fed is supposed to discuss this week all the things you might expect: “the economy, financial markets, and the future path of rates”, according to the WSJ. Fed chairman Powell will not be holding a press conference after the meeting.
FINSUM: This Fed is so hawkish and the economy is rolling so well that even a month’s break from hikes seems like a reprieve. We are a long way from 2013.
(Washington)
This midterm election might have ended up being very consequential for muni bond markets. Some in the muni market feared the possibility of the Republicans maintaining control of both the House and Senate because of how further tax changes could have hurt the finances of municipalities. However, now that Congress is split, the outlook seems more favorable. The reason why is that Congress now looks more likely to restore a tax exemption for a debt refinancing strategy that is often used by local governments.
FINSUM: Just like in other asset classes, having a split Congress looks favorable for munis.
(New York)
There is some alarming data flowing out of the bond market. First it was the huge amounts of bond fund withdrawals, and now new info—issuance is plunging. US investment grade issuance fell 34% in October (from September). High yield issuance was down 50% from last October. Overall annual issuance fell a great deal on both fronts as well. The numbers reflect slumping demand for bonds as rates and yields rise. Investors also pulled $3.1 bn from investment grade bond funds in the week leading up to November 1st.
FINSUM: This is not surprising given what has been going on in markets this month. Even the annual figures make sense given the rise in rates. The big worry is to what degree this will translate into lower demand for Treasuries at the same time as the deficit (and issuance) is about to surge?