Displaying items by tag: yields

(New York)

Almost all of the market articles regarding the results of the midterms have been about stocks, including which sectors might thrive etc. But the real winner might be the bond market. Treasury yields have fallen and spreads between short and longer term bonds have tightened. The reason why is that traders see the forthcoming US budget as more conservative now that Congress is split. In particular, the market thinks there won’t be a big surge in infrastructure spending, and Treasury bond issuance will probably be tighter, both of which have conspired to boost prices.

FINSUM: It is quite odd to think that the election of a Democrat majority to the House would make the market expect more conservative fiscal policy, but the reality is that a divided Congress will probably be less fiscally loose because of gridlock.

(New York)

Investors have been really afraid of the next bear market for the last few months. Ever since spreads grew tighter and the economy became very strong, fears of a looming recession and accompanying bear market have been rampant. Here are six signs to consider about a potential bear market. Firstly, look at high yield bond spreads. When they start to rise, its shows the credit cycle is ending, potentially signaling a recession. Yield curve steepness (or inversion) is another key metric. Deal activity in M&A is also excellent sign. Weekly jobless claims are another strong leading indicator. Finally, look at investor sentiment. When investors are very confident, that tends to be when the bear bites.

FINSUM: This is a pretty good list of leading indicators. Some are flashing red right now, while other are humming along nicely.

(New York)

Something very ominous has been occurring in junk bond markets over the last week. The lowest tier of junk credits—which had been outperforming the market for much of this year—have been getting hammered. There has been a crash in CCC credits. According to Bank of America, since early October CCCs “have lost 3.25% in total and 3.50% in excess returns … effectively wiping out five months of performance”. That contrasts with the highest quality credits in the junk universe, which appreciated.

FINSUM: CCC had been doing quite well, so one can see this either as a normal return to earth, or early signs of trouble.

(New York)

One of the most underappreciated areas of the bond market is in mortgage-backed securities. Anyone familiar with the Financial Crisis will instantly know why. However, the asset class itself offers many attractive advantages compared to other bonds. There are three main points of appeal: higher yields, liquidity, and low correlation to risk assets. MBS ETFs average 2.79% yields (much higher than Treasuries), have much greater liquidity than corporate bonds, and have the lowest correlation to risk assets of any fixed income instrument.

FINSUM: If you can get of the trauma that the acronym caused, MBS can be a very good asset class for many different market environments.

(New York)

One of the big worries in the Treasury market is that foreign demand is waning for Treasury bonds at the same time as supply is surging. This is leading many to stress that US government bond prices could be in for a big fall. However, Bloomberg says that won’t happen. The logic just isn’t there, and neither is the data to back it. Inflation and rates are rising, and so is the Dollar, making the bonds more attractive to hold. Further, US yields and credit-worthiness are looking increasingly positive given the bond market turmoil in Europe.

FINSUM: Because the Dollar is still the dominant world currency, there is a lot of built-in demand for Treasuries. And given the state of US yields versus the rest of the developed world, we don’t think foreign demand is going to shrink.