Bonds: High Yield
(New York)
If investors’ eyes are watering from the big jump in yields over the last month, no one could blame them. The steep rise has sideswiped markets and until today, sent the Nasdaq into a full blown correction, with the rest of the market down strongly too. So how can investors protect their portfolios from losses because of yield jumps? One asset class to consider are rate hedged ETFs, such as the ProShares Investment Grade-Interest Rate Hedged ETF (Cboe: IGHG) and ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG). Both funds go long corporate bonds and short Treasuries, which allows them to remove rate risk, but still keep the benefit of income streams from the underlying corporate bonds.
FINSUM: Rates usually rise when the economy is improving, as is happening now. In these periods, corporate bond spreads usually tighten. So this type of ETF allows you the benefit from the increasing attractiveness of corporate bonds while also protecting against interest rate risk.
(New York)
Treasury yields have risen significantly over the last few weeks. So much so that equities have been absolutely hammered. This has stoked a lot more interested in bonds generally because yields are rising back to more palatable levels. However, thus far, corporate bonds have been getting wounded during the Treasury yield surge. Top bond indexes, like the SPDR Bloomberg Barclays High Yield Bond ETF and the iShares iBoxx $ High Yield Corporate Bond ETF, have each seen major selloffs, with over 1% losses in a single day. Many analysts think that the rise in yields may curtail some corporate debt issuance.
FINSUM: So the immediate view for corporate debt is bearish, but in the medium term it is much brighter. As yields stabilize at higher levels there will be stronger investor demand, and coupled with less issuance, you will have a tight market.
Two junk bond indices, Bloomberg Barclays U.S. Corporate High Yield Index and ICE BofA US High Index Yield, hit record lows both dipping to about 4%...view the full story on our partner Magnifi's site
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(New York)
The market has been extremely volatile this year and that has put many investors on edge, especially those nearing retirement who need to rely on their portfolios for regular income. Treasury yields have gotten so low that they are not a good source of yield. So where to turn? One option is fixed annuities, also called multi-year guaranteed annuities. In contrast to fixed-index annuities or equity-index annuities, the return on MYGAs is not tied to an index. Such MYGAs are currently offering spreads of as much as 300 bp over Treasuries, representing a strong opportunity for those who need guaranteed income.
FINSUM: Two things to bear in mind when considering these—they are generally quite illiquid as the money is “locked up”, and secondly, they do have default risk but often can have limited losses because of state guaranty associations.
(New York)
The yield environment is a terrible one for anyone who is seeking income from their investments, especially those in retirement who may be living on a fixed income. So where can investors seek strong domestic yields? Check out mortgage REITs. Mortgage REITs have long offered some of the highest yields in markets because of the leverage they utilize. Most of the group have yields over 10%. Look at the following names as an example: AGNC Investment Corp. (AGNC, yield 10.2%), Annaly Capital Management, Inc (NLY, 12.9%), Anworth Mortgage Asset Corporation (NH, 14%), and Armour Residential REIT (ARR, 12.3%).
FINSUM: So obviously mortgage REITs have significant interest rate risk, but can you imagine a period where interests rates seem less likely to rise?
(New York)
Anyone who has been looking at the bond markets is likely to be shocked at the recent moves in the space. Many “high yield” bonds (it is now necessary to use quotes) are yielding what very high quality investment grade bonds were just months ago. A recent sale saw $1 bn of new issuance for a BB+ company at a 3% yield. The huge move downward in bond yields is the result of the Fed’s unprecedented stimulus action, and in particular, their mandate to backstop corporate bonds.
FINSUM: The Fed’s actions have been so warping that they have called into question the very definition of a high yield bond. If every bond is backed by the Fed, then it makes perfect sense that their yields would equalize. In this way the market’s reaction is entirely predictable.