Displaying items by tag: yields

(New York)

How to protect against the next recession? This is a difficult question. Since it may be rate induced, it will be hard to hide out in Treasuries, and gold has not inspired much confidence. Well, SkyBridge Capital thinks the big money maker is to short high yields. “Our largest short position right now is in high yield, and it’s not because we think we’re going to make money this year or next year … It’s to protect against the eventual recession or [a] surprise recession”, says a portfolio manager there. “If you’re looking to put on [a] relative cheap short position, it’s hard to figure out how you lose money given how tight spreads are”.

FINSUM: High yield has seen a big expansion of credit and a decline in quality, and when the next recession rolls around there are going to be some big losses.

(New York)

It might not always feel like it, but rising rates are good if you are an income investor. Rates are most definitely rising. Treasury yields are up strongly and the Fed is hiking quarterly. That can cause some rate driven losses even as yields on fixed income assets rise. One fund manager summarized the risks and benefits this way, saying “Rising rates and/or lower equity valuations should lead to higher long-term expected returns, although the movement from low yields to high yields, or high valuations to low valuations, often requires a painful short-term capital loss”.

FINSUM: The move to “low valuations” sounds terrifying as an investor, but the key is to take advantage of higher yields while holding hedged positions.

(New York)

Those worried about rate hikes will be happy to hear this news. Ever-hawkish Jerome Powell is finally starting to sound just a bit more dovish. Powell says the economy is strong, but could face “headwinds”. He says the Fed is discussing how much and how fast to raise rates and acknowledged that the Fed’s actions could inhibit the economy. He said the Fed’s goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low”.

FINSUM: It is good to hear some public consideration that rates might get in the way of the economy. While we would not exactly say this is dovish, it is certainly less aggressive than previously.

(New York)

With all the volatility of the last month, and midterms, less focus has been on one of the most ominous of economic signs—the yield curve. Well, Goldman Sachs has just weighed in, warning investors that a yield curve inversion is looming. Goldman went further than to say that 2-years might be flat or overtake 10-years, the bank said that spreads between 2- and 30-year bonds would fall to zero. To put that call into perspective, it would be a narrowing of 50 basis points versus now. Goldman highlighted the move in its top themes to watch for 2019.

FINSUM: We have to give Goldman Sachs a little credit here as they have been consistently hawkish about rates for at least a year and are sticking to it. We tend to agree with this view.

(New York)

There are a lot of investors out there worried about rates moving higher and bond prices falling as a result. Treasury yields have moved much higher over the last year, which has spooked investors. All that said, one fund manager thinks investors shouldn’t fret too much. The reason why is that markets likely have already priced in rate hikes in, so losses shouldn’t be much. Furthermore, we have actually entered a more normal yield environment, where one can earn meaningful yields on shorter-term credits that don’t have much interest rate risk.

FINSUM: This article raises a good point about the current yield environment. While rate driven losses are worrying, we have finally entered an environment where one can earn comfortable yields on interest rate hedged portfolios.