Bonds: Total Market

(New York)

Ten-year Treasuries are currently sitting at 2.85%, and according to Barron’s, they aren’t going anywhere. The reason why seems to be three part: a weak inflation outlook, trade war, and the combination of so-so growth and a hawkish Fed. All of this makes investors comfortable with sub-3% yields, and the bonds are being supported by their safe haven nature. Another problem is that US yields are much higher than in other developed countries, such as in Europe, keeping demand for Treasuries high.


FINSUM: We see longer end yields as pretty pinned at the moment. There is not much to be bullish about in the long term economic outlook, so it is hard to see why Treasuries would slide.

(New York)

One of the biggest arguments of the junk bond market is this: one needs to be careful of junk bond indexes because they automatically skew investors to the companies with the most debt, making portfolios inherently more risky. The argument has a seemingly sound logic which is similar to the “skew” often referred to in equity ETFs. However, the reality is the complete opposite, as the companies with the most debt actually tend to be larger and have more conservative levels of leverage. The larger companies with the highest total debt in the high yield market tend to have lower default rates, so there is actually no correlative relationship between more debt and higher risk. The analysis is from S&P Global Market Intelligence.


FINSUM: This is very useful analysis, because the more debt = more risk fallacy is an easy-to-fall-into mental trap.

(New York)

Many investors are worried about rising yields, which could wreak havoc on everything from the economy, to income stocks, to all manner of bonds. Well, for what it is worth, Morgan Stanley has just put out a piece arguing that the 3.12% yield seen on the ten-year Treasury recently is it, the peak. Morgan Stanley says that yields will stop rising and they are advising clients to go long Treasury bonds at current yields. The argument stands in contrast to Pimco and JP Morgan, who both see yields moving towards 4%. The one caveat to the call is if trade tensions get settled quickly, as turmoil on that front is one of the bullish drivers they see for Treasuries.


FINSUM: If trade tensions keep flaring we agree that Treasury yields are likely to stay flat or fall as investors flee to safety.

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