If anything is becoming clearer in financial markets, especially after yesterday, it is that rates and yields are bound to rise. Thus many might be worried about how to protect their clients from the changing market. Barron’s has some suggestions. The key is to hold a fixed income portfolio for several years, a minimum of six, and to make sure to reinvest proceeds in higher yielding bonds. To achieve the targeted five-year maturity sweet spot, consider Vanguard’s intermediate Treasury fund, while also mixing in some Treasury Inflation Protected Securities (TIPS) to provide further protection.
FINSUM: This seems like a good strategy for a long period of gradual rate hikes.
The bond market is scaring a lot of investors right now. It is caught between the likelihood for higher rates and fears over a recession. With that in mind, we thought our readers would be interested to hear some thoughts from WisdomTree Financial, who has put out their “highest conviction fixed income trade” over the next two years. While shorter term duration bonds look attractive, especially one- to three-month bills, WisdomTree says investors should move into floating rate treasuries instead. The US floating rate note (FRN) debuted in 2014 and the rate floats based on the 13-week t-bill yield plus a spread. Coupons are paid quarterly.
FINSUM: So shorter duration bonds look attractive because their yields are strong relative to longer maturities and they have less sensitivity to rates. The FRN seems to accomplish the same goal.
The bond market is in flux. It is caught between several strong opposing forces. On the one hand, the Fed looks intent to raise rates. On the other, many are worried about a recession. Finally, the huge and increasing crop of retirees need reliable income. With that in mind, here are some potentially good bond buys from Pimco. The fund manager doesn’t think we will have a recession soon, saying “We think the [economic] cycle will continue for the next couple of years, but stocks aren’t cheap and bonds aren’t cheap”. Pimco suggests looking at high quality junk bonds, and the short end of the Treasury yield curve (e.g. 2-years, which are yielding over 2%).
FINSUM: High quality junk is still yielding over 5%, while the short-end of Treasuries also looks appealing. We don’t think there is a reason to flood out of bonds yet.
Investors beware of yields. That is the message from one of Wall Street’s most respected names in fixed income. In particular, Jeffrey Gundlach is warning that if ten-year Treasury yields get to over 3% then it will spell doom for stocks. Yields are currently at 2.84%, down from a peak on February 21st of 2.95%. “My idea that the S&P would go down on the year would become an extraordinarily strong conviction as the 10-year starts to make an accelerated move above 3 percent”, says Gundlach.
FINSUM: So the argument here seems to be based on the idea that stocks would become less attractive as investors could earn more from bonds given rising yields. That makes some sense given the increasing size of the retirement population.
One way to judge the fear level of investors in regards to inflation is to look at flows into TIPS, or Treasury Inflation-Protected Securities. The bond market had its biggest bout of volatility in around a decade over the last 6 weeks, and one big upshot of that has been a surge into TIPS, as investors seek a safe haven for the strong rise in inflation which they see coming. BlackRock’s TIPS ETF, for instance, just hit a new high with $25 bn under management.
FINSUM: Interest in TIPS has a lot to do with the Fed and rates, but also with the government’s budget deficit, which is set to widen.