Displaying items by tag: bonds

(New York)

Short-term bonds are looking like an ever better buy right now. Two-year Treasury yields are at 2.87%, up from 1.55% a year ago, and well over the 1.9% average yield of the S&P 500. That means the spread between the two- and ten-year notes is only about 28 basis points. Considering the latter has significantly more rate risk, two-year bonds like a good bet right now.

FINSUM: There are many ultra short-term bond funds out there to choose from. Actually, given the breadth of ETFs in the space, there has never been a better or cheaper time to play defense in this kind of rate environment.

(New York)

Every time there is a bout of volatility, the financial media, and inevitably a few market analysts, forecast that ETFs may be at the center of the next flare up. Yet for the most part, ETFs have held up very well to periods of turmoil. Despite this solid performance though, the creeping logic that they might have a problem lingers. The Financial Times has just posted an article which argues that just as ETFs have managed to magnify the rise in equities, they will also exacerbate the fall. Since so many assets are now in passive funds, the risk of a herd mentality—with all investors having similar stop-loss orders—leading to a big selloff seems likely. Further, since there are fewer active managers playing the role of contrarians as the market falls, who is going to be there to insulate the market when it begins to tumble?

FINSUM: The ETF structure has proven itself quite resilient so far. We are not saying there won’t be a problem, but we feel like the underlying problem in the next meltdown might not have to do with ETFs themselves, rather it may just be magnified by them.

(New York)

Want to maintain your portfolio’s income, but also afraid of rising rates? Many are, as it is a difficult challenge keep income high but not experience losses. With that in mind, here are a handful of mutual funds which should help do just that. One area to look for diversified income right now is in multi-asset income funds. Some of the best are the American Funds Income Fund of America (AMECX), the Vanguard Wellesley Income (VWINX), the BlackRock Multi-Asset Income (BAICX), the JPMorgan Income Builder (JNBAX), and the Principal Global Diversified Income (PGBAX).

FINSUM: Many of these funds are quite old and have had great performance. Fees are all over the map, but one of the areas where they tend to succeed is in having good performance with lower volatility than the market as a whole.

(New York)

By now one would have expected junk bonds to have experienced a large selloff. The sector already had a low spread to Treasuries, has mountains of fringe credits, and has been facing a period of rising rates. Yet, high yield has been performing very well, with the weakest credits, paradoxically, performing best. There has been no sustained flight out of the sector, and spreads are higher than at the start of the month, but still not even where they were for much of the year.

FINSUM: The big risk here is that investors aren’t being paid enough for the risks they are taking. The whole junk sector, not to mention the loads of BBB credits that are technically investment grade, are very susceptible to recession and higher rates. At some point there are going to be some major losses.

(New York)

We have been running a lot of stories lately about the best investments for a rising rate environment. The reasons are obvious. However, instead of pointing out ETFs for allocation etc, we found a good piece interviewing money managers about how they are handling their portfolios. Some of those interviewed are relying on short-term bonds to minimize their rate risk. Since the yield curve is quite flat, you get almost no extra compensation for the rate risk of holding longer maturity bonds. One manager highlighted that bonds in the 2-5 year window were a sweet spot. Some also said the market is over-discounting inflation and that inflation linked assets were a good idea.

FINSUM: Short-term bonds seem a like good play, but we have also been impressed with the interest rate hedged ETFs out there, which often go long corporate bonds and short Treasuries to offset any losses. They seem to have performed well.