Displaying items by tag: income
There has been a lot of worry about bond prices recently. With inflation rising steeply and the bond market still regaining its footing, it is easy to worry about another sharp selloff. Because junk bonds are on the riskier end of the fixed income spectrum, many think there is more risk in this area. However, the opposite is true, especially in a rising economy. Because they tend to have higher yields and shorter terms, junk bonds naturally have less rate risk. Additionally, because of their underlying financials, junk bonds have a lot to gain in a rising economy. For example, they may be likely to get upgraded, and because of their relatively weak financial positioning to begin with, even minor gains can mean substantial valuation improvements.
FINSUM: If you need income, then high yield bonds are one of the best bets given their natural rate hedging and their potential for significant financial improvement.
Inflation worries may have surged this Spring, but that has not helped real yields. When you compare the yields of stocks and bonds versus inflation, the truth is that real yields have turned negative. It is unusual for the S&P 500 to have a negative yield, which is currently at -0.81%. That is slightly better than 10-year Treasuries’ real yield of -0.87%. This has usually spelled trouble historically. Going back to 1970, there has only been one instance when the market did not decline at least 32% in the two years following the point at which yields went negative.
FINSUM: This is a pretty scary statistic, but then again, most historical contexts don’t involve a pandemic-induced country-wide shutdown and unprecedented government stimulus.
Last week's jobs report was disappointing, to say the least, but bond market investors want to know what exactly this means for the recovery: Is this a blip or are we headed for a weakening recovery? Markets are signaling that it could be a slower tightening than they initially might have expected but upcoming data will help investors solidify their response. Job’s Openings and Labor turnover survey (jolts) will tell investors if there is a labor market slump. CPI inflation numbers on food and energy will tell investors how big the labor market spillover troubles are. Additionally, real average hourly earnings are included in this report to be released Wednesday. Finally, retail sales data is released for April on Friday. Growth is expected to slow already but the additional slowdown could be a warning.
FINSUM: These data releases are critical for not only what the bond market sees but what the Fed sees as well. If economic data slows this could change the cadence of the recovery and QE.
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Income is both extremely desired, and very hard to achieve in today’s market. Based on the economic data which hit the morning of the 7th, it seems likely to stay that way. So where are the best places to find income? One of the first places investors think of outside of bonds is the dividend aristocrats, but the bad news is they are only yielding 1.9%. If you need more income, check out high yield bond ETFs like the SPDR Bloomberg Barclays High-Yield Bond ETF (JNK), which yields 4%. But the best bet is to look at bond closed end funds, for example the DoubleLine Income Solutions Fund run by bond legend Jeffrey Gundlach. The fund yields 7.3%.
FINSUM: Bond closed end funds are great. Many trade at a discount to their NAV and they have very nice yields.