Bonds: Total Market
Many investors are fretting over the rising bond yields which are sending their prices tumbling, but this could just be the tip of the iceberg. The aggregate bond index AGG has already fallen 3.9% and that's with the critical 10-year T-bill only rising to a 2% yield. If the 10-year hikes all the way up to its high of 3.25% in 2018 that could be a disaster. With inflation at a 40-year high that's a real possibility and any yield you are getting is all eaten away at. However, if inflation is temporary (caused by supply chains) or Fed pulls breaks fast enough then yields might be maxing out, and bond prices could turn around.
Finsum: Inflation expectations are remarkably low which means that investors are convinced either the Fed will credibly bring inflation down or as supply chains loosen that will bring inflation down. Markets are saying that bond risk is priced in.
(New York)
The market took a nosedive in the middle of the day today as investors were walloped with a hot CPI inflation reading. The CPI rose an eye-popping 5.4% in June, with core inflation coming in at 4.5%. The market was anticipating a flat 5.0% CPI number. Indexes turned downward immediately following the report. It should be noted than June 2020 was the nadir of the pandemic inflation readings, so that makes this report look even bigger.
FINSUM: The inflation boogeyman returns. Beware a big sell-off across the board in bonds, especially if the Fed or a member of the Fed makes any tightening comments.
(Washington)
The Fed announced an unprecedented monetary stimulus package this morning. The central bank declared that its new bond buying program was unlimited, and that it would immediately start buying hundreds of billions of different types of bonds in an effort to unclog credit markets. They also extended lending facilities to new markets such as municipal bonds.
FINSUM: The Fed has been far from shy to in reacting to this crisis, but nothing it is doing seems to be helping markets much. Post-announcement, the Dow is already down over 3%.
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(New York)
It has taken a long time for bond ETFs to begin getting even a tiny bit of the attention stock ETFs have gotten, but the trend has finally taken hold in earnest, and that s good news for investors. While active bond funds have done well in recent years (perhaps due to it being considered easier to outperform a bond index than a stock index), bond ETFs have now started to surpass them in growth. This is adding much more liquidity to bond funds, which benefits investors substantially. Both active and passive bond funds have taken in over $200 bn each in 2019.
FINSUM: While “liquidity mismatch” worries will continue to linger, the fact is that bond ETFs make a lot of sense (perhaps even more than stock ETFs?) because they circumvent minimum-buy and illiquidity issues, allowing many more people to access hard-to-reach corners of the bond market.
(New York)
Jay Powell, head of the Fed, has been working on a year-long project to overhaul one of the Fed’s most important goals. That goal is full employment. The Fed only has two mandates, stable prices in the economy, and maximum employment. Yet the definition of maximum employment is now up for debate. At the core of the consideration is the idea that having a job is different than having a good job. The difference between the two means the Fed may use a different calculation for measuring employment. That potential change has huge implications, as it would likely lead to looser monetary policy both in the immediate future and further out.
FINSUM: We think there is a big difference between the quality of different jobs in the economy which needs to be accounted for by the Fed. The current way of measuring employment was designed when most jobs were permanent and full-time, but with the rise of the gig economy, measuring methods need to shift to account for the changing nature of the labor market.
(New York)
Bond ETFs ae set to break a landmark record this year—$1 tn in AUM. The number is a big deal for bond ETFs, which got off to a slower start than their equity counterparts. In recent years, though, bond ETFs have seen huge inflows as they allow investors a more liquid option for both strategic and longer-term allocations. The market is also seeing a good deal of innovation, with more nuanced approaches spreading much like they have in equities.
FINSUM: Overall this is excellent news for investors. More AUM means more liquidity, more options, and lower costs. There are still some fears about a liquidity mismatch between the ETF and the underlying blowing up during a crisis, but those have never materialized.