Displaying items by tag: inflation

Many investors have moved off of REITs and they are trading well below their 200-day moving averages. This makes them a value proposition, particularly as volatility starts to rise. Uncertainty particularly around Ukraine and Russia is fueling volatility but its uncorrelated with REIT volatility which gives it a huge risk advantage on top of it all they are more robust to inflation. Two great REITs to consider with great value at the moment are Alexandria Real Estate Equities and Crown Castle International. These REITs have healthcare and telecom exposures respectively which are in a particularly attractive position as healthcare spending is a higher portion of budgets and 5G is exploding.

Finsum: It’s easy to see that alternatives should be seeing inflows given the volatility in traditional equity and bond markets.

Bond yields have been on a rollercoaster and the market seems to be having trouble making up its mind about the direction. On the one hand investors are fearful over Fed rate hikes and, increasingly, how soaring oil prices will drive up inflation. On the other hand, there is an element of anxiety that the war in Ukraine might scuttle global growth, which would point towards lower yields in the future. Perhaps the worst outcome though is both: stagflation.

FINSUM: In our view, the whipsawing of yields is misguided. Oil is not a big enough component of the economy to cause inflation to spin out of control and if you compare the macro outlook of today to three weeks ago, it is clearly more bearish. Thus, we think yields will trend downward so long as this conflict continues.

Inflation and interest rate risks are two of the most prominent risks in the economy, and they are the reason so many are fleeing traditional fixed income. One place many investors are turning is to annuities, but how does interest rate risk affect annuities? For fixed annuities appreciating rates mean investors can get a better payout with the same premium and generally expand the offerings. For variable annuities, it's trickier as they are more tied to equity markets. If the Fed hikes too aggressively and markets respond adversely this could hurt variable rate products but if the stock market stays steady they won’t be under much pressure. As an income value proposition generally they both perform better than bonds in raising rates because higher yields (inflation and interest rates both moving) suppress bond prices directly.

FINSUM: Annuities have a lot of value in rising rates environments as an income product especially compared to government securities and CDs. 

Oil prices have been rising about as fast as any point in recent time and with Oil prices pushing close to $100 a barrel, President Biden has frozen a whole selection of new Oil leases in order to accommodate green energy policies. This all is imposed based on newly tagged costs to the ‘social cost’ of carbon emissions, attempting to quantify the costs of climate change. However, there is lots of supply price pressure due to both OPEC+ and the Russia-Ukraine tensions.

Finsum: The U.S. needs oil supply now as much as ever, companies are reopening shale drilling sites that were not thought profitable because Oil could hit $100 a barrel.

Investors have been flocking to strange corners of the fixed income market as pressures are rising from both the Fed and inflation. The latest place investors are finding relief is floating rate investment-grade corporate debt. Corporations were reluctant to create in the early stages of the pandemic to supply floating rate debt with yields near zero on government debt. However, there is a huge demand for floating-rate debt today, and large investment banks like JPMorgan, Morgan Stanley and Citigroup Inc. are all jumping into the investment-grade bond market. Floating rate risk allows investors to mitigate duration risk which with rate hikes pending is a potential threat.

Finsum: This could be just the start of the trend or there could be a lot more to come, but look for the less used avenues of the debt market to start to spark with fixed income in the place it's in.