Displaying items by tag: TINA

(New York)

Until every recently (and even now), junk bond yields were historically low. This was not a surprise since Treasuries were also at historic lows. But the whole situation begs an important question—why are junk bonds so popular when their yields are so low? It seems like an abundance of risk with little return. The answer to the question is that “there is no alternative”. Many fund managers have mandates to invest in a minimum holding of bonds, no matter what their yields. Therefore, when that cash needs to find a home in fixed income, it naturally finds its way towards the highest-yielding bonds, even if those might be quite risky. This helps explains the huge decline in yields since March 2020 (from an average of 12% yield to under 4% in February).

FINSUM: “There is no alternative” (TINA), is the same explanation given for the big rise in equities since after the Financial Crisis, and even since the beginning of the pandemic. Frankly, the argument seems to hold water.

(Washington)

The Fed made some highly anticipated policy adjustments at the end of last week. This was not about short-term rate moves either, but rather about its long-term role in the recovery and how it plans to manage the economy. The biggest change seems rather small in wording. The Fed basically corrected its mandate to say that it would not automatically tighten policy just because employment had reached or exceeded what it consider to be “full employment”. In effect, this means that the Fed is ready, willing, able to let the economy run very hot for many years. Analysts think the Fed will likely not hike again until at least 2024.

FINSUM: So the Fed is going to be very accommodative for the next several years. It is starting to feel like equity valuations are going to have no choice but to rise as the Fed has taken “there is no alternative” to a never-before seen level for equities.