Bonds: Total Market
(New York)
Those who only pay causal attention to muni bonds might be scared away from the market by negative stories about big buildups in debt, bankruptcies, and a general erosion in credit quality. However, this year, nothing could be further from the truth. There has been a massive deleveraging of the sector in 2018, with total US muni bond issuance down a whopping 17% to-date, and on pace for 25% by the end of the year. The dearth of issuance has pushed yields down and prices up. “It’s a seller’s market”, says one muni bond analyst.
FINSUM: Part of the lack of new issuance is due to the federal tax changes, but nonetheless, the market is looking increasingly healthy.
(New York)
Everyone knows it has not been a good year for bonds, especially Treasuries and long-dated bonds. However, did you know that it is July and the bond market is on pace for its worst annual performance in a century? (yes you read that correctly). Global bonds are on pace for an annualized loss of 3.5%. So the question is how can one keep money in the market, but not get hammered. The answer is high-grade, short-term bond funds. Floating rate corporate loans and high-yield municipals seem like good areas of focus. Remember that shorter duration bonds are less susceptible to interest rate risk, which makes them safer as the Fed raises rates.
FINSUM: These picks seem spot on to us. Higher-yielding, shorter duration, and floating rates all appear to be good selections for the current environment.
(New York)
Yields have been pinned for several weeks now. Ten-year US Treasuries are currently trading around 2.86% and have been at that level for some time, while thirty-year bonds are also under 3%. The typical reasons cited for this are the looming trade war and fear of recession, which makes the bonds look attractive. However, there may be a much less obvious reason yields are staying low—a poorly known tax benefit being exploited by institutional investors. Pension funds have been devouring Treasuries as the new tax cuts incentivize companies to contribute majorly to their pension funding. And since pension funds tend to invest in long-dated bonds as a way of matching their liability timeline, long-dated Treasuries have seen massive inflows.
FINSUM: There has been so much speculation about yields being pinned, and one of the main reasons behind it seems to be a tax incentive. Very interesting to know that it is not necessarily the economic environment keeping downward pressure on yields.
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(New York)
Only those watching the bond market closely would have noticed it, but a huge Treasury meltdown may have started yesterday. One month US Treasury bills saw yields jump an eye-popping 10 basis points in an instant. The incident followed one of the worst Treasury Bill auctions in a decade, where there was little demand from investors. The two possible answers for the terrible auction are the unusual date (it was moved because of the Fourth of July), or that China has indeed slowed or cut off its purchases of US debt.
FINSUM: The US better hope this bad auction was just a fluke of the calendar. That view is supported by the fact that longer-term Treasury auctions at the same time were much closer to normal.
(Beijing)
One of the big downside risks for the US in its current trade war with China concerns the fact that Beijing owns $1.18 tn of US Treasuries. They also own billions of US mortgage bonds. The big question is whether they will decide to use such ownership as a weapon against the US. For instance, if they sold off large quantities of the bonds, it could send US yields spiking. However, it seems unlikely they would do say for a number of reasons. Firstly, it would hurt the value of their own holdings and all their other Dollar-denominated assets, and it would engender a lot more punitive action from the US. Some consider it the economic equivalent of “mutually assured destruction”.
FINSUM: This is a grave risk for the US because of how it would push up rates all through the economy, but we do not think the trade war has gotten this serious yet.
(New York)
Ten-year Treasuries are currently sitting at 2.85%, and according to Barron’s, they aren’t going anywhere. The reason why seems to be three part: a weak inflation outlook, trade war, and the combination of so-so growth and a hawkish Fed. All of this makes investors comfortable with sub-3% yields, and the bonds are being supported by their safe haven nature. Another problem is that US yields are much higher than in other developed countries, such as in Europe, keeping demand for Treasuries high.
FINSUM: We see longer end yields as pretty pinned at the moment. There is not much to be bullish about in the long term economic outlook, so it is hard to see why Treasuries would slide.