Displaying items by tag: yields

(New York)

Advisors looking for good sources of income for clients should check out this piece, which is comprised of actual advisor ideas. Income is a tricky question at the moment, as one needs to preserve short-term income but also protect against rising interest rate risk. One key point is to focus on total return, or harvesting income not just from coupons and dividends but from portfolio gains too. While reaching for good yields in bonds can be very risky at the moment, considering sticking to traditional short-term bonds, but laddering their maturities from 1 to 5 years. Once you have that in place consider adding some higher-yielding options, like high yield municipals. MLPs are another good potential option given how strong the oil market is.

FINSUM: This is a nice range of specific ideas from other advisors. We favor short-term bonds for income right now, as yields are solid and interest rate risk is comparatively lower.

(New York)

The current rate environment has put investors in a pickle. How does one protect short-term income needs while also protecting against interest rate risk? One important factor is to remember is that one can balance short-term losses by holding bonds to maturity, so stringing together groups of short-term bonds can be a solid risk-mitigating, but yield-maximizing strategy. There are a number of funds to look at to make managing the situation easier. These include the Lord Abbott Short Duration Income Fund (LDLFX), Transamerica short-term bond (ITAAX), and the Nuveen Short Duration High Yield Municipal bond (NVHIX).

FINSUM: It is a difficult fixed income environment right now, with corporate bonds broadly in the red for the year. A well-crafted and balanced strategy is a must, and given that short-term bonds currently have strong yields and less interest rate risk, they seem like the best bet.

(New York)

One the biggest and most conservative asset managers on the street has just put out an ominous warning to investors. Vanguard has just told investors that a near term recession (by 2020) is looking more likely. The asset manager is worried about the flattening yield curve and rising credit risk for sub-investment grade bonds. Vanguard says the odds of a recession in the next six months are 10%, and 30-40% by the end of 2020. The comments are unusual for Vanguard, who has stayed positive on the economy and is usually very conservative in calling markets and the economy.

FINSUM: Our own view is that the chances of a recession by the end of 2020 are much higher than what Vanguard is calling for.

(Washington)

This has been a week of divergent views on bonds. Earlier this week we ran a story arguing that there would be no bear market in Treasuries. It was a solid argument. However, now there is a contention out there that ten-years, specifically, might struggle. The reason why is that demand at auction has been falling for the bonds just at a time when the US needs to issue more and more to cover its deficit. In addition to excess supply, the other big issue seems to be that short-term Treasuries are yielding so much relative to ten-years, that there is little incentive to buy them.

FINSUM: In one sense this is bad, but in another good. The downside is that holders of ten-years (which are a huge component of fixed income indexes) will be hurt as yields rise. But on the positive side, this is exactly the kind of force that keeps the yield curve from inverting as longer-term yields rise alongside shorter-term ones.

(New York)

With all of the bearish stories swirling around lately (us included), it was refreshing to find an alternative view today. Bloomberg has put out an argument that there will be no bear market in store for Treasuries. The story is from the top ranked bond strategist in the world, who points out that a decline in structured credit and related products means that Treasuries are a much higher component of overall fixed income indexes these days. This concentration is likely to keep rising over the next decade, which means indexes and benchmarks will need to buy Treasuries, a critical factor which will keep demand high. Another important point is that the stock market is losing its appeal compared to short-term Treasuries, as the yield of the latter is way ahead of the former and likely to stay that way.

FINSUM: This is excellent analysis from a highly reputably source. Our only addition would be to point out that US and global demography also reinforces the key points, as the aging of the world means there will be a higher demand for income investments over the next decade.