Displaying items by tag: yields

(Washington)

Something very odd is going on in the minds of investors. Data on the economy continues to come out very strongly, with Q1 growth at 3.2%, and the market are nothing short of astonishing, up 25% since its December low. But at the same time, many investors and analysts think the Fed will cut rates. The reason why is disinflation, or the fact that the inflation number refuses to rise to the Fed’s target. Looking more broadly, you also have weakening in China and a slowdown in Europe, so there are macro headwinds that could wound the US. Analysts tend to fall in one camp or the other on hikes, with some, like Scott Minerd of Guggenheim, calling the idea “plainly wrong”.

FINSUM: It is very hard to predict what the Fed will do because their u-turn earlier this year caught everyone by surprise. Our bet is that if the current data holds steady, there won’t be any hikes.

(New York)

Investors beware, the muni bond market has gone through some dramatic moves over the last year, and the market looks like it might be headed for a downturn. Changes to the US’ tax policy have caused massive inflows to muni bonds as investors try to minimize their taxes. This has caused yields to plunge and spreads to Treasuries to widen. The average ten-year muni yield is now just 1.965% versus 2.6% in 10-year Treasuries, the widest gap since at least 2009. Munis in high tax states have plunged even further, with a recent California issuance having a yield of just 1.73%. One portfolio manager warns investors that they need to be responsive, saying “The best place for investors to be is shorter duration, higher-quality credit, so when opportunities present themselves, they have the flexibility to take them … You can’t really set it and forget it”.

FINSUM: This is a hard situation to call. On the one hand, the rapid fall in yields is worrying and the market seems overbought, but on the other hand, you have somewhat artificial demand being created by the government, which makes the behavior less risky and more sustainable in our view.

(New York)

The real estate market has been worrying and disappointing for well over a year now. Home sales and new constructions have been trending poorly, all of which has worried investors that a recession may be on the way. However, this year’s drop in yields has made mortgages much more affordable, which seems to be helping the market. Big market player Realtor.com has just put out its updated outlook for the year, saying “lower, but still increasing mortgage rates that will buoy home prices and sales by boosting buyers’ purchasing power beyond what we initially projected”.

FINSUM: For a $200,000 mortgage, the difference in monthly payments right now is already almost a $150 lower versus what it was in the fourth quarter. That is a meaningful difference for many families.

(San Francisco)

One of the core tenants of US central banking is being shunned by Jay Powell’s Fed. Former central bank leadership had always taken the approach that tight labor markets posed a serious threat for higher inflation. However, Powell is stepping away from that view. Labor markets remain tight, with unemployment very low and strong job creation consistent. Yet, the Fed has completely stepped off the gas pedal on rate hikes, a position that runs counter to previous approaches.

FINSUM: At least in this cycle, the relationship between labor markets and inflation seems to be thoroughly broken. The reality is that no one can give a great answer as to why, but Powell’s policy nonetheless sticks to the idea that the link is severed.

(New York)

One of the odd things about the recession fears since December is that spreads on junk bonds have not risen. Usually, junk bonds sell-off when there are recession fears, as they are the riskiest credits and likely to suffer the worst downturns. However, the opposite has happened in junk, with spreads to investment grade very tight. In fact, investors are picking up so little extra yield in junk bonds, that in many cases they are not even worth the risk. Spreads are tied for their narrowest since the Financial Crisis at just 60 basis points.

FINSUM: The last time spreads got this tight was last October, right before the market tanked. Warning sign.