(New York)
In what comes as a very important sign for the wider US economy, lower rates and yields are apparently not flowing through to mortgages in the way that many expected. One of the bright economic spots in the big market volatility recently has been the hope that much lower rates would stimulate more housing demand. Mortgages rates have actually risen by 20 bp since March 5th despite the huge fall in Treasury yields. Even since mid-February (when the market was peaking), mortgage rates have only dropped 15 bp to 3.35% for a 30-year fixed.
FINSUM: This is very important because it takes a 75 bp fall for a typical homeowner to save money on a refinancing. We are not even close to that yet, so hard to see any economic boost coming.
(New York)
The bond market responded in a big way to President’s Trump’s hints at stimulus today with yields rising sharply. Markets have been hoping central banks may step in to support the economy, and Trump himself has made some bold hints about what may be in store. In particular, the President is favoring a potentially major tax cut to help support the economy. More specifically, Trump is focusing on payroll tax cuts among other options. However, some news outlets say the administration is far from enacting specific policies.
FINSUM: Our bet is Trump will try to unleash a big tax cut combined with other stimulus measures. He knows he needs to keep the economy afloat to get re-elected, so support measures seem very likely.
(New York)
Sudden downturns and crises have a knack for exposing underlying weakness in asset classes, and this coronavirus shock looks likely to expose corporate bonds. As investors will know, there are trillions of Dollars worth of bonds hanging on the lower cusp of investment grade at the same time as high yield issuance has surged in recent years. A quick reversal in economic fortunes could quickly cause soaring yields, delinquency, and bankruptcies. This would lead to a sharp drop in bond prices and potential economic disruptions.
FINSUM: Two key points to make on this story. Firstly, the corporate bond market is now worth $10 tn, 10x the size of 2001. Secondly, because many high yield bonds are illiquid and difficult to trade in periods of uncertainty, investors will try to offload other assets instead, which can spread the panic to other asset classes.
(New York)
The bond market looks primed for a big correction, says a top asset manager. Bonds have been surging in price as yields fall because of fears over coronavirus, but they seem likely to have a sharp pullback once the news cycle focusing on the virus moves on. That is the argument coming out of asset manager WisdomTree. According to the firm’s head of Fixed Income Strategy, if we have a sharp “V” shaped recovery, then bonds might see yields jump sharply (and prices fall sharply).
FINSUM: WisdomTree made one other excellent point that is not as obvious. US companies are starting to seek alternative suppliers away from China. As this happens, there is likely to be a transitory pickup in inflation since prices are probably going to be higher from suppliers outside of China. Accordingly, bond markets might also react sharply to a rise in inflation.
(New York)
Yields have fallen precipitously of late. Ten-years have been touching around the 1.5% mark, and now another big threshold has been crossed—30-years have fallen below 2%. The latest moved downward was propelled by Apple’s announcement about coronavirus being likely to make it miss revenue estimates. The bigger question is about how investors should react. Bond prices are again enormously rich, and worse, there is little dependable yield.
FINSUM: This seems like a post-crisis repeat all over again. With yields so low, it feels like the market has returned to “TINA” (there is no alternative to stocks).
(New York)
Bonds have been in a bull market for the entire living memory of almost everyone in the financial industry. Yields are extremely low, prices are high, and stocks are peaking every week. Even if you are worried about bonds, the odds that they keep rising seem strong given some undeniably supportive factors. Those include a Fed that not only says it has no intention of hiking rates, but is actually undertaking a stealth form of QE by buying $60 bn of Treasury bills every month to make sure the financial system has adequate cash reserves.
FINSUM: Everything in the market is pointing to a repeat of the post-Crisis market paradigm—ultra-low rates, rising stocks. Should we expect a different outcome this time?
(New York)
Investors seem to have every reason to worry about bonds. Prices are high, yields are low, and low quality companies are accessing easy financing even in the face of an uncertain economic future. With all that said, there might not be any reason to worry at all. Central banks are still gaming the system. From the Fed being really conservative with rates, to the ECB and BOJ doing massive QE, the whole central bank mechanism is conspiring to prop up bond prices in a major way.
FINSUM: As long as that pre-condition of huge central bank support is in place, it is hard to see bonds taking much of a hit.
(New York)
For many, many years muni bonds have been the go-to for tax-free income. While their yields were lower than conventional credits, there was usually a significant cost-savings by investing in the bonds because of the lack of taxation. However, the muni market is so over-bought that it is very difficult to find bonds where that is still the case. Prices have moved yields so low that there are virtually no savings versus Treasuries. 2019 saw muni bonds experience their highest inflows since 2009, and according to Morningstar “For most taxpayers, there’s no longer a significant yield advantage for muni funds after you take taxes into account”.
FINSUM: Weak yields and no savings, which is going to push investors to buy ever riskier munis. Boom time coming for lower-rated credits?
(New York)
Ban of America says it is a very good time for investors to buy TIPS, or Treasury Inflation-protected securities. The bank thinks inflation expectations are going to rise this year and they are bullish on long-dated TIPS. The call is notable as many fund managers lost money with similar bets after the Crisis, when many thought inflation would jump alongside QE. This time may be different as the Fed has explicitly said it would let inflation run hot to compensate for the slow inflation we have had for the last decade.
FINSUM: We just don’t see inflation rising much in the near term. There are still a lot of worries about the economy. We feel like 2019 would have been the year for big inflation worries/rises, but it didn’t materialize.
(New York)
There is big risk to the muni bond market that you are probably aren’t thinking about. That risk is how increasingly frequent weather-related calamities are befalling US cities as the climate changes. The market is already starting to price these risks, and according to BlackRock, many current muni bond issuers could see 1% knocked of their economic output. According to the head of muni bonds at BNY Mellon, “The risk has been identified by market participants … Looking at the severity of storms picking up . . . it will start to be factored in”. When choosing bonds, investors need to start demanding or checking on plans from issuers. “What plans are they making? Are they hardening their infrastructure . . . are they trying to insulate central services? If they’re just stating the obvious, that’s not sufficient”, says BNY Mellon.
FINSUM: This is an important consideration for all those that hold munis. Think of the weather-related calamities that have happened lately and consider the implications (e.g. Houston).
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(New York)
For around a year now, the yield curve has been scaring investors. The inversion of the curve sent a grave warning sign to the market that a recession may be on its way. Many investors fled the market for fear of a big reversal. However, as we enter 2020, the yield curve is sending a very different signal—optimism. The curve is at its steepest level since October 2018, showing investors’ increasing confidence in the US economy. One CIO described the situation this way, saying “If the stock market is right that everything is amazing, I don’t see how long rates can stay as low as they are … The stock market is rallying on hope. Hope that things will inflect higher with this trade deal and Fed accommodation”.
FINSUM: If there is one thing we have learned in the last decade, it is that the Fed does not want to over-hike on rates. Overall, we think this is a very healthy direction for yields.
(New York)
It has taken a long time for bond ETFs to begin getting even a tiny bit of the attention stock ETFs have gotten, but the trend has finally taken hold in earnest, and that s good news for investors. While active bond funds have done well in recent years (perhaps due to it being considered easier to outperform a bond index than a stock index), bond ETFs have now started to surpass them in growth. This is adding much more liquidity to bond funds, which benefits investors substantially. Both active and passive bond funds have taken in over $200 bn each in 2019.
FINSUM: While “liquidity mismatch” worries will continue to linger, the fact is that bond ETFs make a lot of sense (perhaps even more than stock ETFs?) because they circumvent minimum-buy and illiquidity issues, allowing many more people to access hard-to-reach corners of the bond market.
(New York)
Goldman put out a warning on Friday and advisors should pay attention. The bank is warning of what it calls a “baby” bear market. The focus this time is not on equities but on bonds, which have mostly been very hot this year. Goldman thinks that Treasury yields are going to take a hit in 2020, falling back to around 2.25% on the ten-year. That is a pretty large move from the 1.7% level seen today. The catch on Goldman’s call is that it doesn’t really see the move beginning until the second half of 2020, so it is a bit of a delayed bet.
FINSUM: This is quite a long-term view and in Goldman’s own words is contingent upon investors thinking the Fed might hike rates. That seems a LONG way off; at least post-2020 election we would think.
(New York)
After what was a great run for much of this year, ETFs investors are fleeing bonds. After yields fell sharply for most of 2019, investors have been stung this month as yields have shot higher. Ten-year Treasuries have gone from 1.7% to 1.9% yields, causing over half of all bonds to lose value. Investors have been pulling billions out of funds as a result. The iShares 20-year Treasury ETF has lost 7.8% since August 28th. One of the areas that has been more durable is high yield, where average prices have risen a little over 1% in the same time frame.
FINSUM: Bonds losing is a sign that investors are getting less worried about a recession, which in our view is an optimistic sign.