Displaying items by tag: rates

(New York)

The yield curve is the center of attention right now. The short end is yielding more than the long end, everything feels upside down. So how to play it? Yields on long-term bonds have fallen so steeply that it seems foolish to think they will continue to do so. Inflation is still around and the Fed still has a goal to get the country to 2%, which means yields seems more likely to rise than fall (unless you think a recession is imminent). Accordingly, there are two ways to play this curve. The first is to use a “bullet” strategy by buying only intermediate term bonds, which tend to do well when the yield curve steepens, especially if short-term rates actually fall. For this approach, check out the iPath U.S. Treasury Steepener ETN (STPP). The other option is to remain agnostic as to direction, buying something like the iShares Core U.S. Aggregate Bond fund (AGG).

FINSUM: Our own view is that we are not headed into an immediate recession, and thus the long end of the curve looks overbought.

(New York)

Advisors tend to really like dividend stocks, and it makes sense why: clients need good income as they head into retirement. However, this desire leads some (especially retail investors) to overreach, choosing high paying, but ultimately fragile or unsustainable stocks. Right now is a good time to be looking for quality dividend payers, as their valuations relative to the market are the lowest in about 20 years. Some high quality names to look at include Macy’s (6.2%), General Motors (4.1%), Kellogg (4.1%), and Verizon (4.2%).

FINSUM: One of the best ways to judge the quality of dividend stocks is through focusing on free cash flow as that measure shows whether companies can really afford what they are paying out without hurting their underlying business.

(New York)

Tell us an investment that does well when inflation is rising AND when rates are falling? Most investments are sensitive to one or the other, but gold can benefit from both. Rising inflation (and rates) can lead to gold-buying as a hedge, helping prices, while falling rates make the metal’s zero yield look more attractive (and make it easier for overseas buyers). Yet, conditions in the middle of those two extremes—which have prevailed since the Crisis—are usually bearish for the metal, as it does not have a natural place in the portfolio in such conditions. That said, gold’s outlook is now the best it has been in years, as the economy is weakening and rates look likely to fall, weakening the Dollar and clearing the path for appreciation.

FINSUM: Gold is in the most interesting position we have seen for some time and we are inclined to think it might start to rise out the doldrums.

(New York)

Al the stars are aligning for gold. The metal has been in an epic slump for years. The great post-Crisis recovery has not been so for gold, with the asset falling in value considerably from its Euro crisis-era peak. However, yields are coming down and the threat of recession is rising, both factors which make gold likely to do well. Not only would both factors help gold because of its relationship to interest rates (i.e. the lower the better), but a weaker Dollar also helps overseas buyers of the metal.

FINSUM: The other interesting non-macro factor that may help gold is the recent huge merger of Barrick Gold and Randgold, which consolidates the market and offers a more compelling mining stock to own. It may also put a lid on supply, which could boost prices.

(New York)

For the last year all the fear in bond markets was about inflation and how the Fed would handle it. Were we going to be hiked into a recession? Now all of that has shifted and fixed income gurus are concerned over an entirely different beast—recession. In many ways the fears of recession have become so strong that they are intimidating the market as a whole, making the term “bond vigilante” more than appropriate here.

FINSUM: The speed with which the bond market has reversed since December is pretty alarming. We do wonder if this inversion might be a false signal.