FINSUM + Magnifi: Bank of America Warns Investors of Bond Market Correction
April 23, 2021
After a consistent rise in yields in late February and March rates are finally falling as the 10-year
treasury yield sits just over 1.5%. This is mainly coming from the fact that markets are softening to
the recovery and at peace with above-average growth and steering towards full employment by
2022. However, economists at Jefferies are predicting faster growth and lower unemployment
and markets having to re-adjust. This means spikes in 3 and 5-year T-bill yields. Deutsche Bank is
taking a leaning toward a different scenario. Where the Fed outpaces the economy, it is causing too
much wage inflation and causing higher unemployment and sinking yields. Bank of America
likewise warned that the recent fall in yields was not sustainable and the trend will be higher.
Income investors will want to keep their eyes on economic data to see which scenario is playing
out in real-time.
FINSUM + Magnifi: Goldman Sachs says High-Yield Bonds are Income Investors' Fixed Income Solution
April 13, 2021
The recovery has boosted the junk bond market as investors saw investment-grade bonds and government debt perform poorly in Q1. All but 10% of high yield debt is within five percentage points of Treasuries. This has put a squeeze on the possibilities of the return in the high yield market but it's the only fixed income market with any possibility of gains. But Goldman sees junk bonds going higher despite this, and that a growing economy with additional stimulus should provide an environment that produces good returns for more risky corporations. Additionally, junk bonds are uncorrelated with Treasuries and aren’t a hedge but diverse in a portfolio with
investment-grade and government debt.
FINSUM + Magnifi: Why Treasuries Could Not Look Worse
April 6, 2021
Q1 ended about as poorly as possible for the treasury market as losses according to ICE indices hit 4.6%, the worst quarter in over 40 years. The losses were highly concentrated on the longer end of the term structure. Inflation-adjusted (real) yields are negative on 10+ year government bonds. And market-implied 5-year inflation expectations are around 2.6% above the Fed’s target. Many would think that corporate bonds would be a reprieve from the losses but they too posted their worst quarter since the financial crisis. However 30-year yields are on an upswing and it may be the time to buy the dip on long-term treasuries.
FINSUM + Magnifi: World’s Largest Hedge Fund is Abandoning Bonds
(March 2021)
Bond yields are on the rise, from long-term Treasuries to corporate bonds. However, Ray Dalio, founder of Bridgewater, says it's time to drop the bond investing frenzy and to invest in real assets. Dalio has long been an advocate against holding cash and now seems to be taking a similar approach to bonds. Invest in assets that earn a higher return than inflation and have underlying value. Bubble fears are on the rise as government debt is getting out of control. Dalio suggests looking to non-dollar-denominated assets such as developing countries in Asia and China to diversify one's portfolio. Finally, watching how central banks react to the changing bond market will guide investors as to how they should react.Read more
FINSUM + Magnifi: Surging Muni Demand Threatens Returns
(February 2021)
Municipal bond market returns remain low, but nonetheless investors seem willing to keep demanding low yield munis. This rise in demand has pushed the 10-year muni-treasury spread to -50 basis points. This comes after last March when muni’s were not only higher than the 10-year treasury but 300% of the 10-year t-bill. Part of what is driving the municipal bond market so low is a $12.5 billion dollar influx in muni mutual funds in January alone. The supply side of the market is also affecting rates as issuance slowed in the market. Munis usually provide tax relief for many investors but members of BlackRock’s municipal group said the share of taxable muni’s “remained elevated” at 29%. The group also expects these trends to continue in this segment of the bond market.
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FINSUM + Magnifi: Munis Still Look Attractive
(January 2021)
Advisors don’t need to be told that rates are at ultra-low levels. Yet despite this, munis are still maintaining their attractiveness. Muni issuance was at a recent high in 2020 (the highest level since 2013) with $3.9 tn outstanding. The reason why is that many municipalities have been seeing budget shortfalls because of COVID. Despite the big jump in issuance, demand has kept pace, with investors gobbling up as much as municipalities can issue. Demand has started well this year too, with muni ETFs seeing gains.
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