Bonds: Total Market
(New York)
Individual bond sales to retail clients may be about to take a hit. The reason why is a new set of rules being enacted on brokers that require them to disclose the price at which they bought bonds before they sell them to clients (if it occurs on the same day). The idea of the rule is to give investors a clear idea of the price they are paying for bonds. Brokers are worried that the new rule will cut into their fees and lead investors to stop buying bonds in favor of bond funds.
FINSUM: So we understand the thrust of this rule, but as a counterargument, we ask our readers to consider: what other industries have to disclose their margins to customers during a transaction? When you buy a new iPhone, does apple need to say they have a 90% margin on the phone?
(New York)
There has been a lot of fear about bonds lately. Higher inflation readings, a more hawkish Fed, and 3% Treasury yields have gotten investors nervous. However, bonds might be in for some big gains, especially Treasuries. The reason why is that there is a huge pile of short positons held by hedge funds who are betting against Treasuries. Yet, yields have been stubborn over the last couple of weeks and now it appears the positon might be broken by a strong short squeeze that would send prices higher.
FINSUM: We had not paid much attention to this, but given the weak US inflation reading that has just been released, this may play out very soon.
(New York)
The market has become very fixated on higher rates and yields, with every investor nervous it will cause losses in their stock and bond portfolios. However, one Wall Streeter is saying fears are overblown, especially as it concerns how stocks lose on account of bonds. The logic is that stock P/E ratios never fully took account of ultra-low yields, so in effect, there is a cushion in stock prices against rising yields. Therefore, yields crossing 3% won’t necessarily cause any losses.
FINSUM: This is the “priced-in” logic of stock prices. We must say we do not agree. This kind of argument assumes that investors are being rational and have long memories, as well being agnostic of short-term changes in priority. We do not think the market is this impervious to fear.
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(New York)
It has been many years that analysts have been talking about how and whether technology would disrupt bond trading the way it did stocks. However, until very recently, and aside from ETFs, the market had remained very steady, with voice trading and human connections driving the market. An example of the changes can be seen at fund manager AllianceBernstein, where 35% of all fixed income trades are conducted by an in-house algorithm rather than people. Automation of government bond trading is happening rapidly, as liquidity and standardization is quite high, but some are skeptical technology will ever come to change other areas of fixed income such as corporate debt, municipals etc.
FINSUM: There are simply too many idiosyncrasies (e.g. terms) and too many different bonds to have enough liquidity for electronic trading in corporate and other debt markets. That said, sovereign debt seems likely to be completely dominated by automated trading.
(New York)
Something very interesting is going on in the junk bond market—things are good. The market for risky corporate debt has seen a resurgence over the last couple of months, and even as benchmark yields have risen, returns for junk bonds have been positive. The spread between high yield and benchmark Treasuries has shrunk from 369 basis points to just 333 basis points since February 9th.
FINSUM: This is a very important move as it it is a positive sign about the business cycle. Junk bonds and other credits have often been leading indicators, and the fact that investors are still showing faith in them is very positive.
(New York)
Barron’s has just put out a strong warning telling investors that they should stay away from long-term bonds. If you step back from the day-to-day movements, the picture is clearly that yields are moving higher. For instance, they started April at 2.7% and are now at 3% for the ten-year. The longer the bond, the more its value is affected by yield movements, a concept called “duration risk”. Therefore, when markets are this volatile, it is best to stick to the short end of the curve.
FINSUM: Most advisors will know that investors have been pouring money into short-term bonds, probably because they seem like a great buy. For instance, two-year Treasuries are yielding around 2.5%.