Displaying items by tag: bonds
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.
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).
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?
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.
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?