Displaying items by tag: rates

(New York)

One of the big developments of this month is not just that stocks have been getting hammered, but that bonds are too. While yields have stagnated from their jump a couple weeks ago, bond funds are seeing major outflows. In fact, investors are withdrawing so much capital from bond funds that it is likely to be the worst month for outflows in the last three years. Through October 19th, investors had pulled almost $25 bn from mutual funds and ETFs that invest in bonds. The losses break 21 straight months of inflows.

FINSUM: A couple things to note here. Firstly, considering Treasuries started the year yielding 2.4% and are now at 3.13%, one month of outflows does not seem too bad. On the negative side, however, it is worrying that bonds are seeing major outflows at the same time as stocks are losing in a big way.

(Washington)

President Trump has been complaining about the Fed’s hawkish behavior for several months. However, yesterday he seemed to escalate his discontent into something more specific. He told the media that he “maybe” regretted appointing Powell to lead the Fed. He said he was intentionally signaling the Fed that he wanted lower interest rates, but he acknowledged that the Fed was an independent entity. When pushed about the circumstances under which he would fire Powell, the President declined to comment.

FINSUM: Investors should keep an eye on whether Trump escalates his rhetoric into action. We doubt he will do anything about the Fed in the near term, but the market would certainly have a big reaction.

(New York)

Investors have gotten so used to low inflation that it is sometimes hard to imagine seeing it rise. However, Morgan Stanley is warning that inflation is rising across the globe and investors need to keep an eye on it. In Europe, Asia, and the US, inflation has risen from 1.1% to 1.4%, and it is bound to move higher, according to Morgan Stanley’s chief global economist. Interestingly, MS argues that the Euro area and Japan will see a higher rise in inflation than the US.

FINSUM: If inflation rises more strongly in other developed markets than the US, will that lead to even more foreign buying of US bonds because yields in those locations are so much lower? In other words, will there be even more demand for US bonds?

(New York)

Inflation is rising across the globe, including in the US. Perhaps more pressingly, the Fed seems absolutely intent on hiking rates as the economy continues to perform very strongly. With that in mind, profiting from rising rates, or at least insulating one’s portfolio, needs to become a priority. Accordingly, here are some ETFs to help: iShares Floating Rate Bond ETF (FLOT), the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN), the ProShares High Yield—Interest Rate Hdgd (HYHG), the SPDR Portfolio Short Term Corp Bd ETF (SPSB), and the Vanguard Short-Term Corporate Bond ETF (VCSH).

FINSUM: The ProShares fund seems the most interesting of the lot as it invests in high yield bonds while shorting Treasuries to protect against rate hikes, all while delivering less rate sensitivity than regular short-term bonds.

(New York)

One of the questions that not many are covering is how preferred stock will behave as interest rates rise. Preferreds have been seeing their dividend yields rise as investors have shed Treasuries and exited some preferred-focused ETFs. Some preferreds from prominent companies like JP Morgan and Bank of America are yielding 6%. The largest preferred ETF, PFF, currently yields 5.8%. “We’re incredibly constructive on the market now”, says a preferred fund manager at Nuveen.

FINSUM: Remember that preferreds have a major credit component to them and that issuers are not obligated to pay dividends like they are on bonds. However, corporations take doing so very seriously, which means you can often get junk-like yields from good companies, all with significantly less risk. That said, rates rising will probably spark some further losses.