Displaying items by tag: rates

(New York)

The market has been doing very well lately. Political worries, trade wars, it doesn’t matter, nothing seems to be able to contain the market’s optimism. Despite all this, though, Bank of America says it is all about to come to an end. The bank’s top strategist says that weakening growth, rising rates, and a glut of debt will conspire to weaken stocks. “The Fed is now in the midst of a tightening cycle, ignoring structural deflation, focusing on cyclical inflation … Until this Fed hiking cycle ends we suspect absolute returns from financial assets will remain slim & volatile”. BAML says that weakening bank stocks even in the face of rising rates (which should be good for them) may be a sign of how badly the Fed’s tightening will affect of the overall economy.

FINSUM: This is quite a gloomy and contrarian opinion. We see the argument, but it certainly seems to contradict everything one can observe in the market and economy right now.

(New York)

There has been a lot of focus in the media lately about rising rates and what they will mean for investor portfolios. The ten-year yield is now well over 3% again, and the Fed looks likely to hike twice more before the end of the year. If your fixed income exposure (and equity exposure) isn’t carefully hedge, it could spell losses. Accordingly, here are three ETFs to help offset rate risk: the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN), the iShares Floating Rate Bond ETF (FLOT), and the ProShares High Yield—Interest Rate Hdgd (HYHG). The first two rely on floating rate bonds of short maturities, while the ProShares fund goes long corporate bonds and short Treasuries.

FINSUM: The performance of these kind of hedged ETFs has been good since rates started rising a couple years ago. They seem to have an important role to play in portfolios right now.

(New York)
High dividend yields are almost always a welcome feature for investors. For retirees, they are often an economic lifeline as they help cover everyday expenses. But rising rates pose a risk for such stocks as their value tends to suffer as fixed income becomes more attractive. One way to combat that is with stocks with quick dividend growth. Two such examples are pipeline giants Williams Company (4.8%) and ONEOK (5%). Both have dividend rates double that of the average S&P 500 stock, but they are also expected to grow those dividends (and their cash flow) at double digit annual rates. The two companies expect to grow their dividends by 12.5% and 10% respectively (from already high levels).

FINSUM: Given how high these dividends are already, the growth rate on them should be enough to offset any rate rise-related losses.

(New York)

Rising rates are definitively upon us. The Fed is poised to hike very soon and is likely to do so again before the end of the year. Some popular sectors, especially those with good dividends—REITs, utilities, telecoms—can suffer badly in rising rate periods. Luckily there are several ETFs that can help advisors hedge their exposure. The most common rate hedged ETFs are bond-based and use a strategy of buying higher-yielding corporate bonds and hedging their rate risk by short-selling Treasuries. The strategy seems to work well. For instance, the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) gained about 11% between the 10-year Treasury’s low in July 2016 to now, while its unhedged cousin, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) lost 0.45%.

FINSUM: That is quite a margin between the two funds, which is a testament to how well the strategy performs in rising rate periods. There are several similar funds out there, and they seem like a good idea right now.

(New York)
There has been a lot of doom and gloom about the risks of an inverted yield curve lately. An inverted curve is often seen as the best and most reliable indicator of recession, as it has accurately preceded the last several US recessions. Some are saying this time may be different as market conditions and central bank created stimulus have warped markets. Well, despite the fact that many hate the “this time will be different” mantra, it may actually be true in this case. In particular, the inverted yield curve has only been reliable in the US, whereas in Japan and the UK it is not a good indicator. This means the indicator is by no means universal, and gives weight to the idea that an inversion does not necessarily mean a recession is coming.

FINSUM: The Japanese example is particularly interesting to us as the BOJ has long had extraordinarily accommodative monetary policy. In that sense it may be the best case study for how an inversion could play out this time.