Displaying items by tag: bonds
Despite the big losses in Treasuries, high yield bonds have been doing well, and according to Fidelity that seems likely to continue. Advisors could be forgiven if they are wondering “how?”. The answer is that the big reason bonds are losing is interest rate risk, and it so happens that high yield bonds have some of the lowest interest rate risk around because of their higher coupons and shorter terms. According to Adam Kramer, who managers Fidelity’s Strategic Income Fund, “an economic recovery may be on the horizon and the Fed may avoid tightening monetary conditions for some time”, which he says means the high yield market “could offer investors the best of both worlds in 2021”.
FINSUM: High yield bonds have the lowest exposure to the market’s major risk at the moment and also the upside of an economic recovery. The picture is bright.
Q1 ended about as poorly as possible for the treasury market as losses according to ICE indices hit…see the full story on our partner Magnifi’s site
Those with a lot of money in tech stocks may be starting to breathe a sigh of relief. After a rough period to start the year. The last few weeks has been quite positive for tech, so the worst may be behind us, right? The answer is that it may not be, according to some analysts. There are two huge trends (and one macro factor) that look likely to weigh on the sector for the next year. Firstly, three of the very largest stocks—Facebook, Apple, and Google, have gotten to the point in size where their growth is going to start inevitably slowing, which means the narrative around them will change. Additionally, the success of the vaccine rollout is increasingly, which means a reversal to pre-COVID norms seems likely. Tech stocks are also quite rate sensitive, which gives them a lot of “Fed risk”.
FINSUM: While it is hard to argue with the interest rate risk, we cannot get on board with the other two narratives. Everyone knows FAANG stocks are huge, the growth story is no secret. More generally though, we just don’t buy into the narrative that these stocks will suffer from the “reopening”. Consumer habits in many areas (e.g. grocery shopping and increased food delivery) have changed and that will continue to allow big tech stocks to grab market share and grow. Just ask your grown children and friends how they feel about going back to the grocery store….
Bonds are incredibly expensive right now, but despite this, they may keep going higher, says Goldman Sachs. The firm is specifically referring to high yield bonds, which are very pricey right now and have low spreads to Treasuries. For example, only 10% of high yield bonds currently trade with spreads above 5 percentage points above Treasuries, compared to 25% in November. This makes Goldman believe the easiest gains are already in the bag, but given that high yield bonds are sensitive to an improving economy and they have appreciated even while Treasuries have fallen, Goldman feels the asset class could be in for more appreciation.
FINSUM: This makes sense. It is also worth noting that historically speaking, high yield bonds have no correlation to the performance of Treasuries.
It is pretty easy to sum up what seems like it will be a forthcoming bull market in high yield bonds: “2021 will be the year of the upgrade”. That quote comes from Matt Brill, head of North America investment-grade at Invesco. Ratings agencies are reportedly on the cusp of upgrading between $100 bn and $300 bn of junk bonds to investment grade this year and next. Fund managers are trying to buy the bonds they think will be upgraded as such a move will cause a lot of arbitrary buying by index trackers.
FINSUM: There were huge downgrades last year as the pandemic wiped out prices in big parts of the sector. Now, with the economy resurgent, big upgrades look likely, which should give the whole asset class wings.