Displaying items by tag: bonds

(New York)

Well it finally happened yesterday. The big selloff in bonds finally managed to legitimately spook the equity market. Stocks in the US were down big as the yield on ten-years jumped mightily. The ten-year yield is now 2.73%, the highest in three years, which was a significant mental threshold. Investors are worried that with the world economy doing so well, inflation may again rear its head, causing central banks to raise rates quickly. The S&P 500 fell 0.7% on Monday.

FINSUM: Okay here is the big question we have—why would the world economy doing well and higher rates be negative for stocks? If anything, equities are a good inflation hedge.

(New York)

A lot of analysts and market gurus are currently talking down the high yield sector. Credit spreads have been rising and it does look like we are headed into a higher rate environment, so the arguments seem reasonable. However, Barron’s says there is still time to get in on high yields. One of the best parts of the market right now is that only 10% of it is comprised of CCC rated bonds, way below its average of 15-20%. That means credit-worthiness is better. Additionally, junk firms have been refinancing for years at ultra-low rates, which will keep default rates pinned. Finally, oil and gas firms, which comprise a high share of the market, are in better shape as prices have been recovering.

FINSUM: There are definitely some strong points here, but it would be a highly contrarian view to say that the prospects for the sector look good after surging for so many years. At best, the fundamentals look solid, but the macro environment looks poor.

(New York)

Goldman Sachs is going on the record warning of “extreme” optimism in markets after stocks’ torrid start to the year. The bank says its cross-asset measure of risk appetite is the highest it has been since 1991 (!). The bank says the risk of losses is higher now, but that in their experience, signals from the macro economy tend to trump signals from risk appetite. Therefore, given that the world’s economy is moving nicely, the market may have more room to run. That said, Goldman is nervous about markets, saying “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be”.

FINSUM: We think this grey-haired bull market still has some juice in it, but our big fear is how hard a recession might hit the markets (given high valuations), not just the economy.

(New York)

The stock market is very highly priced at the moment and many think we are in the middle of a “melt up”. With that in mind, many are constantly on the lookout for warning signs that the market might be ready to tumble. Well, some are appearing. The big warning sign is that credit spreads are widening and implied volatility is picking up. It is very unusual for this to occur during a rally, as it usually happens during corrections. This warning comes on top of other red flags, such as stretched investor sentiment, and very positive earnings revisions.

FINSUM: The bond market has long been known for leading the stock market, and credit spreads are one of the indicators we tend to take very seriously. Definitely something to pay attention to.

(New York)

There has been A LOT of talk lately about a bond bear market. The idea is that rates are now in a secular rising cycle led by a hawkish Fed and rising inflation. The issue with that view is two-fold. Firstly, the bond market “experts” calling for the bear market are well-served if it comes true because of the strategies they use. And secondly, there isn’t really evidence of much inflation and the Fed is not looking overly hawkish. The one really worrying thing is that the economy has been performing well, which does lend itself to rising rates and more money flowing into risk assets.

FINSUM: We think all these worries are premature. We have a new Fed chief coming in which now one is sure about, and there just isn’t much inflation. Plus, there are tens of millions of people retiring who will need income investments.