Markets

(New York)

The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.


FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.

(New York)

One of the aspects of this bear market that has really alarmed investors is the speed with which the market has rallied from its lows. Huge gains of well over 35% have shocked investors into feeling like indexes are bound to fall again. In some sense that sentiment makes sense since it has happened before, such as in the dotcom bubble. However, according to BlackRock, it is absolutely time to go risk-on, but with a twist. The asset manager says that sovereign bonds have very little upside or protection to offer right now, so instead investors should put their capital into credit and higher-quality equities. “Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities”.


FINSUM: We particularly like the argument about sovereign bonds not offer much right now. With central banks already at their zero lower bound and sovereigns priced very highly, there is just not much to gain and plenty to lose.

(Chicago)

The muni market is at an interesting crossroads. There have been big fears that the current lockdown might be a huge negative for muni credits. The lockdown not only raises costs, but it constrains tax revenue at the same time. On its own, this is a big threat. However, the Fed has set up a liquidity facility particularly for states and municipalities to borrow, which is a major help. That said, analysts say some credits will be excluded. The problem is that the Fed has put limits on the size of cities and counties able to participate, as well as fairly onerous language, such as municipalities having to promise that they cannot “secure adequate credit accommodations from other banking institutions”.


FINSUM: The Fed’s restrictions on this program are surely going to constrain its efficacy. So, on the whole this seems like good news, but not as good as investors would like.

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