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: Why Financial Stocks Will Rally Big
March 2021
Eyes and ears have been on the Fed as the bond market still is unsure of the future of inflation, but it
was a different Fed announcement that had the market moving on Thursday. The Fed announced that
pending stress tests, the restrictions put on dividends and share buybacks will be lifted this summer. The
measures were put on banks to ensure financial security through the crisis. If banks fail to meet the capital requirements imposed by the Fed, then the restrictions will continue. Banking stocks ticked up
on the news as S&P Bank ETF KBE rose 2.8% on the announcement.
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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FINSUM + Magnifi: The SEC May Make Big Changes to the Muni Market
(January 2021)
One of the big risks to the muni sector that has gone under-appreciated by the financial media and investing community is the threat of the soon-to-be revamped SEC making some big changes to the asset class. The reason for concern is that Elad Roisman was recently appointed interim chief of the SEC. Roisman has long had a focus on transparency in fixed income markets, which he and others at the SEC feel is too opaque. This has raised the risk of new regulation in the space. That said, his short tenure before likely being replaced by Biden will limit his time frame to change any policy.
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FINSUM + Magnifi: Big Near-Term Losses in Bonds May Have Just Begun
(October 2020)
Anyone watching the fixed income markets this week will have noticed a surprising and worrying trend: the yield curve steepened without any real positive signs from the economy. The spread between five-year and thirty-year Treasuries reached its highest point since 2016 this week. The reason why is that with Trump having COVID, markets have been betting more on a Biden victory and a possible blue sweep. That has raised expectations for more debt issuance as part of additional stimulus, all of which would change the supply and demand picture in the Treasury market.
FINSUM + Magnifi: The Best Bond Funds for These Volatile Times
(October 2020)
Not only is the market worried about the election and its possible contestation, but there is a pandemic and ultra-low interest rates complicating matters for the bond market. Some have compared the current rate environment to Japan, but in reality, it is worse since the US still has inflation, and thus genuinely negative rates. This has made fixed income one of the most volatile parts of any portfolio when it used to be the safe haven. So how can investors construct a robust and healthy allocation to fixed income? The key is balancing the need for income with the need for safety. Here are some top bond funds whose managers are seeking to do just that: the BlackRock High Yield Bond / BHYAX, the T. Rowe Price Spectrum Income / RPSIX, and the Baird Aggregate Bond / BAGSX.
FINSUM + Magnifi: Vanguard Launches New Bond ETF with Custom ESG Strategy
(September 2020)
ESG has been flourishing since COVID began. ESG and COVID era investing naturally align—at their core, both are about risk mitigation. However, the challenge is figuring out the best way to invest in ESG. The whole area is vague. There are many funds to choose from, but the way fund providers separate good companies from bad is complicated and often opaque. To this environment, enter a new fund from Vanguard, the Vanguard ESG U.S. Corporate Bond ETF. The fund covers the broad corporate bond space with an ESG lens, but does so with a very well-defined methodology. The fund is using an ESG index specially developed by MSCI and Bloomberg. The index uses a “exclusionary screening process” which filters out companies involved in various vice industries, gas, GMOs, oil, thermal coal, firearms, and anything nuclear-related.
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