Displaying items by tag: fixed income

(New York)

Only those watching the bond market closely would have noticed it, but a huge Treasury meltdown may have started yesterday. One month US Treasury bills saw yields jump an eye-popping 10 basis points in an instant. The incident followed one of the worst Treasury Bill auctions in a decade, where there was little demand from investors. The two possible answers for the terrible auction are the unusual date (it was moved because of the Fourth of July), or that China has indeed slowed or cut off its purchases of US debt.

FINSUM: The US better hope this bad auction was just a fluke of the calendar. That view is supported by the fact that longer-term Treasury auctions at the same time were much closer to normal.

(New York)

It has been many years that analysts have been talking about how and whether technology would disrupt bond trading the way it did stocks. However, until very recently, and aside from ETFs, the market had remained very steady, with voice trading and human connections driving the market. An example of the changes can be seen at fund manager AllianceBernstein, where 35% of all fixed income trades are conducted by an in-house algorithm rather than people. Automation of government bond trading is happening rapidly, as liquidity and standardization is quite high, but some are skeptical technology will ever come to change other areas of fixed income such as corporate debt, municipals etc.

FINSUM: There are simply too many idiosyncrasies (e.g. terms) and too many different bonds to have enough liquidity for electronic trading in corporate and other debt markets. That said, sovereign debt seems likely to be completely dominated by automated trading.

(New York)

Barron’s has just put out a strong warning telling investors that they should stay away from long-term bonds. If you step back from the day-to-day movements, the picture is clearly that yields are moving higher. For instance, they started April at 2.7% and are now at 3% for the ten-year. The longer the bond, the more its value is affected by yield movements, a concept called “duration risk”. Therefore, when markets are this volatile, it is best to stick to the short end of the curve.

FINSUM: Most advisors will know that investors have been pouring money into short-term bonds, probably because they seem like a great buy. For instance, two-year Treasuries are yielding around 2.5%.

(New York)

The bond market is scaring a lot of investors right now. It is caught between the likelihood for higher rates and fears over a recession. With that in mind, we thought our readers would be interested to hear some thoughts from WisdomTree Financial, who has put out their “highest conviction fixed income trade” over the next two years. While shorter term duration bonds look attractive, especially one- to three-month bills, WisdomTree says investors should move into floating rate treasuries instead. The US floating rate note (FRN) debuted in 2014 and the rate floats based on the 13-week t-bill yield plus a spread. Coupons are paid quarterly.

FINSUM: So shorter duration bonds look attractive because their yields are strong relative to longer maturities and they have less sensitivity to rates. The FRN seems to accomplish the same goal.

(New York)

The old fears are rising anew, and not without reason. With volatility now back in a big way, fears are once again stirring about the reliability of ETFs. In previous market flare ups there have been some major ETF losses. The ETF industry is worth $4 tn and has never been through a bear market at its current size. The biggest fears are in fixed income ETFs, where the “liquidity mismatch” is greatest between the tradable ETFs and the illiquid underlying bonds.

FINSUM: With rates and yields set to rise, there could be some volatility in fixed income, which means there could be some big issues in fixed income ETFs, especially in the most illiquid areas.