Bonds: Total Market

(New York)
There has been a lot of doom and gloom about the risks of an inverted yield curve lately. An inverted curve is often seen as the best and most reliable indicator of recession, as it has accurately preceded the last several US recessions. Some are saying this time may be different as market conditions and central bank created stimulus have warped markets. Well, despite the fact that many hate the “this time will be different” mantra, it may actually be true in this case. In particular, the inverted yield curve has only been reliable in the US, whereas in Japan and the UK it is not a good indicator. This means the indicator is by no means universal, and gives weight to the idea that an inversion does not necessarily mean a recession is coming.

FINSUM: The Japanese example is particularly interesting to us as the BOJ has long had extraordinarily accommodative monetary policy. In that sense it may be the best case study for how an inversion could play out this time.

(New York)

Rates look to be rising quickly. The economy is red hot and the Fed is hawkish, meaning two more rate hikes this year look very likely. With that in mind, investors need to protect themselves from rate risk. That means a lot of sources of income, like dividends stocks and bonds, could become sources of losses. However, fortunately there are numerous ETFs that can help investors earn income while protecting against losses. One such is Pimco’s 0-5 Year High Yield Corporate Bond (HYS). The ETF has a yield approaching 5% and has a duration of just over 2 years, putting it in the low duration category (meaning it has low rate risk).

FINSUM: This seems like a good option if you want to earn high rate-protected income. Given the current rate environment, funds like these should probably be a fixture of most portfolios.

(New York)

If there were ever a time to be worried about rate risk it is now. The US economy is red hot and the Fed continues to look hawkish. Two rate hikes by the end of the year look like a certainty. So how can one protect their portfolio? One answer is floating rate bonds, and especially floating rate investment grade bonds with a range of durations. One ETF that does just that is the X-trackers Investment Grade Bond – Interest Rate Hedged ETF (IGIH). The ETF sports a yield of over 3%, and very importantly, it has a duration of almost zero, meaning it should be almost completely unaffected by any movement in rates.

FINSUM: a 3% yield with no rate risk sounds like a very good investment in the current environment.

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