The muni market has traditionally been a safe haven for investors seeking steady returns. However, things are beginning to change. The huge drop in yields is fueling some very risky behavior in certain corners of the muni bond market. With yields on even the riskiest munis down to about 4%, highly speculative borrowers, such as those building risky mall developments or far-away housing projects are raising muni money through governmental agencies.
FINSUM: Investors need to look out for these kind of deals. However, what could be more troublesome is how they will inevitably end up in many popular funds without investors even having awareness of them.
The inverted yield curve may be odd, and negative yields in Europe may be strange, but the weirdest current perversion of markets (or is it the “new normal”?) is in Denmark specifically. That oddity is the negative rate mortgage. Yes, homebuyers are getting paid to take out mortgages to buy a home. Jyske Bank, Denmark’s third largest lender, is offering a mortgage rate of -.50% before fees.
FINSUM: So this is already happening in Europe, but it may have limited effects given the continent’s demographic struggles. It is hard to imagine this happening in the US, but if it did, we bet it would cause a housing boom.
Bloomberg has published a very insightful article about the current state of the market. In particular, it offers a view of how the big run up in bonds is likely to end. The fears that are driving the bond market—mostly that de-globalization will cause a recession—can only end two ways. Either the recession and de-globalization never materialize, in which case yields shoot back up, causing big losses in bonds. Or, the breakdown of global trade does happen, In this scenario, goods likely become significantly more expensive (especially in west) because there is no more labor and cost arbitrage. In this scenario, inflation then jumps, again sending yields much higher and sparking losses. In other words, the current bond market can only end in tears.
FINSUM: This was a very insightful argument in Bloomberg today. While there are some nuances that might cause some different outcomes, the basic contention is quite astute. Stocks seems a much better bet.
The inverted yield curve has investors feeling down on their luck at the moment. What is the best way to play the turmoil and volatility? The answer may be in two seemingly unlikely places. The first is in energy ETFs, especially oil. Energy stocks have traditionally done very well during inverted yield curves, so an ETF like XLE seems like a good bet right now. Additionally, tech ETFs such as Vanguard’s VGT could be a good play, according to Bloomberg. Tech has often done well during inversions in the past.
FINSUM: Recommending a tech ETF right now is the height of contrarianism. Tech is basically caught in the middle of the trade war, and frankly, seems like a bad buy.
Every investor seems to be panicking about the yield curve right now, and not without reason. An inverted yield curve has accurately predicted each of the last several recessions. And not only is the yield curve inverted, but yields are shockingly low—the 30-year Treasury yield just went sub-2% for the first time ever. However, that is not what you should be worried about, argues a top economist at the Economic Outlook Group. Instead, you should be watching consumers like a hawk, as they will be the deciding factor as to whether the US heads into a recession. “All eyes should therefore be laser focused on what households are thinking and doing in the coming months--- and not on some tampered yield curve”, says Bernard Baumohl, chief global economist at the Economic Outlook group.
FINSUM: The yield curve is less manipulated than it once was, but we are far from a rate environment one could say was comparable to inversions past. We think this analysis is spot on.
Yields are really low, right? No! In fact, they are high. That is how investors may need to start thinking about yields. Everything we thought we knew from the last 50 years might be worthless now. The CIO of Northern Trust explains “I continue to be surprised by my fellow asset management professionals who think that the long-term norm for the 10-year U.S. Treasury should be closer to 4% or even 4.5% … This is just too high when you consider among other facts that there is $15 trillion invested the bond markets globally right now that is carrying a negative interest rate”. He continued “On the day of this discussion the Swiss 10-year is at negative 90 basis points, the German 10-year is trading at negative 56 basis points, and the Japanese 10-year is at minus 20 basis points … So, why would the U.S. 10-year trading at close to 1.5% or 1.75% seem low? It’s in fact unusually high in the global context”.
FINSUM: Maybe super “low” yields are the new normal, and we should think of the US’ yield level as abnormally high right now. It is hard to stomach and has enormous implications, but it may very well be the truth.