Displaying items by tag: bonds

Monday, 29 October 2018 13:11

Foreign Selling Could Wound Treasuries

(New York)

There is a significant minority of investors who have a very particular worry about the Treasury market right now. That worry is that foreign demand for Treasuries is slumping, which could cause a big sell-off or sustained period of losses. The potential issue has two parts—the first is that a huge amount of Treasury issuance is set to take place, the second is that foreign holdings of Treasuries are at their lowest in 15 years. The combination of seemingly low demand with high supply is making some think the bonds could be in for a rout alongside forthcoming auctions. JP Morgan strategists estimate that yields on Treasuries will rise 7-8 basis points for every $200 bn of Treasuries sold. Foreigners hold $6.3 tn of Treasuries.


FINSUM: This could be a problem, but given that central bank reserves have not been growing, it makes sense that foreign Treasury holdings haven’t either. Foreign governments still need Dollar liquidity, so there is a built in demand for Treasuries which we think won’t simply evaporate.

Published in Bonds: Treasuries
Monday, 29 October 2018 13:09

Why Junk Bonds Aren’t Falling Alongside Stocks

(New York)

One of the big questions in this market fall is why junk bonds aren’t tumbling in tandem with stocks. Generally speaking, high yield bonds trade in the same direction as small cap stocks as they are driven more by company fundamentals than other areas of the bond market. However, in the recent rout, this was not the case, as junk bonds have continued to perform well. When both markets fall in unison, it usually means there is big trouble brewing, but when they have become uncorrelated, it can mean there is a rally to come. For instance, in 2011, small caps fells strongly, but junk only a touch. In the following months, small caps surged 15%.


FINSUM: We think this is a positive sign for small caps, as high yield investors are not worried about company fundamentals.

Published in Bonds: High Yield
Friday, 26 October 2018 12:14

How to Profit from Rising Rates

(New York)


The reality is that the Fed has been hiking steadily, and investors should expect 2-3 more hikes in 2019. That means that adjusting one’s portfolio is a must. One thing to remember is that there are now plenty of ETFs that are designed to not lose from rates rising and still give an easy 2-3% yield. This is a big change from the post-Crisis paradigm, where safety meant negligible yields. One conservative way to play the environment is the SPDR Barclays 1-3 Treasury Bill ETF (BIL). Another is the iShares Floating Rate Bond ETF (FLOT), which only yields 2.5%, but with very little rate risk. One much more intriguing option is the WisdomTree Barclays U.S. Aggregate Bond Negative Duration ETF (AGDN). This fund holds a long bond position coupled with a short Treasury position with a target duration of -5 years, meaning it is designed to gain when rates rise.


FINSUM: This is a good selection of ETFs, and that Wisdomtree option looks quite interesting. It truly seems a way to profit as rates rise.

Published in Bonds: Total Market
Thursday, 25 October 2018 13:08

Buy this Sector to Beat Rates

(New York)

If one thing is apparent about the Fed, it is that Jerome Powell and his team are much more hawkish than Yellen or Bernanke. Therefore, it looks like rates are going to continue to rise (even in the face of a market protest, such as is occurring). With that in mind, investors need to find ways to hedge their portfolios or profit from rising rates. One area to look is at bank ETFs. Banks tend to do well as interest rates rise as the lift in rates boosts their net interest margins, a key source of revenue for the sector. Accordingly, take a look at the Financial Select Sector SPDR Fund (XLF) and the SPDR S&P Regional Banking ETF (KRE), both of which had been attracting capital. Additionally, see the First Trust Nasdaq Bank ETF (FTXO), Invesco KBW Bank ETF (KBWB), and the SPDR S&P Bank ETF (KBE).


FINSUM: Banks stocks seem to be a good buy so long as we don’t get an inverted yield curve.

Published in Bonds: Total Market
Wednesday, 24 October 2018 09:39

Bond Funds are Bleeding

(New York)

One of the big developments of this month is not just that stocks have been getting hammered, but that bonds are too. While yields have stagnated from their jump a couple weeks ago, bond funds are seeing major outflows. In fact, investors are withdrawing so much capital from bond funds that it is likely to be the worst month for outflows in the last three years. Through October 19th, investors had pulled almost $25 bn from mutual funds and ETFs that invest in bonds. The losses break 21 straight months of inflows.


FINSUM: A couple things to note here. Firstly, considering Treasuries started the year yielding 2.4% and are now at 3.13%, one month of outflows does not seem too bad. On the negative side, however, it is worrying that bonds are seeing major outflows at the same time as stocks are losing in a big way.

Published in Bonds: Total Market

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