Displaying items by tag: bonds

(New York)

Emerging markets have been on a wild ride this year, with many entering into bear markets. But what about EM debt? That market has faced headwinds as the US Dollar is strengthening on the back of expectations for higher rates. However, some bond fund managers really like EM debt right now. While USD denominated debt from countries like Argentina get a lot of the attention, local currency EM debt can be very rewarding. In Brazil and Mexico, for instance, local currency bonds are yielding 10% and 7%, respectively. Other countries with solid local currency debt are South Africa, India, and Indonesia.

FINSUM: So there seem to be two big risks here. One is the exchange rate risk, and the other is credit risk. That said, these yields do seem to be rewarding, and worthwhile if they are a small part of a portfolio.

(New York)

There have been a lot of fears about the junk bond market both over the last few years and in recent months. Many worry what a rising rate period would mean for the sector. However, the bigger worry might actually be a recession. Bank of America Merrill Lynch has recently put out a report analyzing the sector, and they highlight a potentially big worry. As many know, over the last decade, companies have gorged on BBB rated bonds (the lowest rung of investment grade), issuing trillions worth. However, the big risk is that in a recession, default rates will surge, profits will fall, and many of those bonds will be downgraded into junk status. When that occurs, many investments funds will be obligated to sell them because of mandates, which could cause a massive exodus and big losses.

FINSUM: The giant BBB market, which has been the superstar of the high yield sector since the Crisis, seems like it might be poised for a serious rough patch come the next recession.

(New York)

US Treasury bonds got walloped yesterday. Yields on the ten-year fell over 10 basis points following weeks of relative calm. The big move happened in the early afternoon yesterday, and sent ETFs sharply lower. The jump in yields was not contained to the 10-year either, as 20-years and 2-years rose as well. The big question is why the sharp move occurred. Analysts are saying it was actually overseas influences that drove the losses. In particular, the Bank of Japan announced a policy change that would send rates higher, which spilled over to the US. Further, some better news on the trade war front might have sent some money out of Treasuries after a flight to quality in previous weeks.

FINSUM: This is a really sharp move for it to have been from overseas alone, as these kind of big jumps usually move in reverse. It is hard to draw any conclusions, but it may indicate there are bigger losses to come.

(Johannesburg)

Emerging markets had a very poor first half to the year, with equities entering into a bear market and bonds suffering losses too. However, in recent weeks, bonds have started to rally, which has made some hopeful a big rebound is on the way. That said, American fund managers are not rushing back in, saying that the bonds are very risky. In fact, a survey by Citi found that even though prices are rising, top EM bond fund managers are getting bearish and are setting aside more cash in anticipation of losses.

FINSUM: Dollar-denominated bonds from the likes of Argentina, Egypt, and Brazil have their appeal—high yields, but they do hold a lot of risk, especially in a period of rising rates and a rising Dollar.

(New York)

If you have been following the situation closely, you will have noticed that the Fed is pretty uniformly dismissing the risks of our almost-inverted yield curve. The central bank thinks that central bank bond buying has held long-term yields to artificially low levels, and accordingly, they think the only 30 bp spread between two- and ten-year Treasuries is of no concern. The problem is that this is almost the exact same logic the Fed used when the yield curve inverted in 2006. Then they said it was a global savings glut keeping long-term yields pinned. Soon after, the US went in to recession and the Crisis erupted.

FINSUM: A big part of the problem here is not just that higher rates could lead to a recession, but that low long-term yields drive investors into riskier investments (just as they did pre-Crisis), so the flat yield curve is actually very worrying. The Fed is sleeping walking into a bear trap.