(New York)

We have been running a lot of stories lately about the best investments for a rising rate environment. The reasons are obvious. However, instead of pointing out ETFs for allocation etc, we found a good piece interviewing money managers about how they are handling their portfolios. Some of those interviewed are relying on short-term bonds to minimize their rate risk. Since the yield curve is quite flat, you get almost no extra compensation for the rate risk of holding longer maturity bonds. One manager highlighted that bonds in the 2-5 year window were a sweet spot. Some also said the market is over-discounting inflation and that inflation linked assets were a good idea.

FINSUM: Short-term bonds seem a like good play, but we have also been impressed with the interest rate hedged ETFs out there, which often go long corporate bonds and short Treasuries to offset any losses. They seem to have performed well.

(New York)

Junk bonds have had a rough monthly, and it is not hard to see why. The rise in yields and the anxiety about stocks have combined to push yields on junk steeply higher, from 6.18% on October 1st to 6.61% now. In aggregate, the bonds are down 1%+ this month. However, the truth is that the losses could have been much worse, and within that idea, is an important story. That story is that ETFs, which have offered much greater ease of access to investors, actually seemed to have supported prices in the recent turmoil. The head of bond trading at Oppenheimer put it best, saying “The ETF market, which was supposed to subtract liquidity from credit markets, is actually adding liquidity by aggregating the risk and bringing in people who want to take macro risk as opposed to micro bond level risk … The ETF market ends up providing the live bid-ask spread that even the credit markets themselves cannot generate”.

FINSUM: This is a fascinating argument as it runs counter to the long-running narrative about how fixed income ETFs could cause a big blow up because of a “liquidity mismatch” between ETFs and the underlying asset.

(New York)

If you are looking for the canary in the coal mine for the current market turbulence, look no further than a handful of stocks that should show investors where things are headed. Especially for the Dow. The index’s gains this year have largely come from three stocks: Apple, Boeing, and UnitedHealth Group. 16 stocks in the 30-stock index have losses this year, but because of the quirky way the Dow is calculated, some smaller market capitalization companies have much more weight than larger ones (weighting is done by share price not market cap). Accordingly, this trio has outsized importance to the index, and if they fall, the Dow is likely to get badly hurt.

FINSUM: The Dow is quite funky, but this story points out just how vulnerable the whole index looks right now.

(New York)

Rising rates are good for financials, right? Well, not always, especially for asset managers. The sector is not as directly impacted by rate rises as banks, and investors need to be on the look out for losses. The whole sector is experiencing a grave fee war, with fund pricing recently hitting zero. All managers are now in an effective race to the bottom on fees and only a handful of winners will emerge, all reliant on increasing scale massively to make the low fees viable.

FINSUM: Asset managers are in a nasty and long-term fight. The damage to shares would have been much worse, but the rise in stocks and other assets has boosted AUM, which has offset a lot of the lost revenue from lower fees, helping to insulate the sector.

(New York)

Something very odd happened in markets yesterday—the reaction to a stimulus had gotten so bad, that it reversed the original stimulus. We are of course referring to the fact that the stock sell-off, itself seemingly a response to the rise in bond yields recently, became so bad yesterday, that bond yields finally turned around and moved lower. In other words, bonds scared stocks so much that bonds themselves got scared. The stock market has fallen more than 5% in two days.

FINSUM: This was an interesting, albeit easy to forecast, move. It makes one wonder, which is the cart and which is the horse?