Displaying items by tag: yields
The bond market seems to have lost all touch with reality. Yields are extremely low, and given the more relaxed inflation reading this month, seem likely to stay pinned. Now consider this: European corporate debt real yields just turned negative. Yes, you are paying for the privilege of holding corporate debt. The ICE BofA index of European high-yield bonds is now at 2.34%, well below inflation.
FINSUM: Is there were ever a sign of a peak, this is it. Bond yields have nowhere to go but up, as there is no defensible logic that they could sustainably move lower. Unfortunately, it seems as though bonds and equity could move hand in hand, as the catalyst for big losses would be the Fed, which would trigger both asset classes.
Income investors and many wealthy clients have struggled to find the outlet post-pandemic for relatively safe capital accumulation, but real estate investment trusts are that release valve. Reflation trade, stimulus-driven output in the economy, is driving a boom in commercial and residential properties. Reopening of the parts of the economy is driving REITs like EPR Properties, which hold movie theaters, ski resorts, water parks, indoor skydiving. It’s not limited to just adventure opportunities, data centers, cannabis cultivation, and crypto mining facilities are all burgeoning opportunities in REITs. David Auerbach of World Equity Group says that capital raising is ‘in vogue in the REIT sector because they proxy traditional capital appreciation vehicles. Ground leases in particular are one of the best investments in this sector. Along with additional measures that can be taken for a tax advantage, ground leases offer the upside of equity with maturity risks and capital structure to bonds.
FINSUM: The flight to safe assets is driving a groundswell of opportunities in REITs. With the economy reopening, and stimulus pumping through it, REITs are an opportunity to hit the safe return of bonds with the equity upside.
When you say bond legend, only one name likely comes to mind (let’s leave Gundlach out of this for a minute): Bill Gross. And old Bill always has an opinion, and this week it is a very strong one: “bonds are trash”. Bill says that bonds are now in the investment garbage can because Fed tapering in the first half of 2022 will likely cause a rise in Treasury yields from 1.3% now to 2% next year, causing an overall loss of around 3% over the next 12 months. According to Gross, “Cash has been trash for a long time but there are now new contenders for the investment garbage can. Intermediate to long-term bond funds are in that trash receptacle for sure”.
FINSUM: This is logically sound, but the timing is entirely dependent on the Fed.
Usually big Wall Street banks are pretty moderate in their outlooks, and they are mostly bullish in general. Well, Bank of America Merrill Lynch didn’t hold back this week when they said the S&P 500 was at risk of a 16.5% tumble in the near term. The bank said that it expects the S&P 500 to fall 20 to 30 bp for every basis point increase in the ten-year Treasury. The bank thinks yields will rise 55 bp by the end the year, implying an up to 16.5% tumble in stocks. The bank says valuations are overstretched by almost every metric.
FINSUM: The bank did point out three sectors it felt were safer, which are energy, communications services, and health care.
The bond market is in an odd place right now. For the first part of the year, yields jumped on the threat of inflation. Then in the middle of Spring, those fears started to wane and yields started to fall. Other than a quick reversal of direction off a hot June inflation reading, that has been the trend all summer. However, the whole market looks very vulnerable to a change in sentiment. If inflation comes in warm again for July—especially coupled with some very good jobs numbers—the overall economic picture might move back to bullish, which could swing yields rapidly back in the direction they were headed in Q1.
FINSUM: Essentially this market could quickly realized it mispriced the direction of the economy, so there is a lot of risk for advisors and their clients. Nasdaq and Fidelity are having an interesting webinar on how to plan for this risk. Check it out here.