Displaying items by tag: bonds

(New York)

Hate him or love him, you have definitely heard of him and may respect him. Paul Krugman is one of the most famous economists in the world, and he has just put out a warning we think investors need to hear. Krugman’s big fear is that trouble is building in the economy and the Fed doesn’t have much firepower to help stimulate things if and when growth heads backwards. “There seems to be an accumulation of smaller problems and the underlying backdrop is that we have no good policy response”. Krugman argues that hiking rates was never “grounded in the data” to start with and that “Continuing to raise rates was really looking like a bad idea”.

FINSUM: What we know is that a recession will come at some time, what we don’t know is when. Krugman has given sometime in the next two years as his timeline, which to us wreaks of a lack of confidence.

(New York)

Stock investors and bond investors are showing a big disconnect right now. That mismatch in sentiment could cause some big losses. Fixed income investors have been buying bonds aggressively, keeping yields pinned at low levels and the curve very flat. However, equity markets have been rallying strongly, which will alleviate some pressure on the Fed, allowing them more margin to raise rates again. However, the bond derivatives market shows the market is betting there is a 98% chance rates are in exactly the same place as now in one year’s time.

FINSUM: Bond investors are too comfortable with the Fed right now. Powell et al have been quite hawkish for awhile now, only very recently backing off. We don’t think it would take much to get them back on track, and the equity market is paving the way.

(New York)

Some advisors are always searching for the next blow up on the horizon. Well, with that in mind, Fitch has just put out a warning to investors that the next big market storm will likely start in credit funds. Fitch’s warning is predicated on the well-trod idea of a liquidity mismatch between the daily liquidity that open-end bond funds offer, and the relative illiquidity of their underlying holdings. In December, open-ended loan funds saw steep withdrawals, which led to big losses.

FINSUM: This is a fairly well-covered topic, but it is still a big risk. It has not yet happened on a major scale, but if it did, the potential for losses is massive.

(New York)

Active funds have been much maligned in the press over the last couple of years. The rise of passive investing has drawn the value of active investing into question, and the media has focused lot of attention on large groups of underperforming funds. That said, active funds, at least in fixed income, are winning right now. In every period from one to ten-years, actively managed bond funds have outperformed ETFs. Such funds are less constrained in their ability to seek out safe high yields, whether that be in junk bonds or emerging markets.

FINSUM: In many ways this makes sense, as there are many more bonds than there are equities, which means that there is likely more alpha to be generated through an unconstrained approach.

(New York)

There are currently a lot of fears about corporate credit’s ability to sink the economy and markets. There has been an absolute massive surge in issuance since the Financial Crisis, and a great deal of that issuance happened in credits just on the bottom fringe of investment grade. And while a good amount of that debt may founder and sink into junk, it won’t be enough to hurt the economy much. The reason? It is because US households have not increased their leverage significantly in recent years, which is likely to prove a saving grace for the economy. Growth in household debt has been lower than inflation, a sign of relative health.

FINSUM: While corporate credit can get markets in trouble, so long as the American consumer is not deleveraging, things will probably not get too bad in the wider economy.