(New York)

The bond market responded in a big way to President’s Trump’s hints at stimulus today with yields rising sharply. Markets have been hoping central banks may step in to support the economy, and Trump himself has made some bold hints about what may be in store. In particular, the President is favoring a potentially major tax cut to help support the economy. More specifically, Trump is focusing on payroll tax cuts among other options. However, some news outlets say the administration is far from enacting specific policies.

FINSUM: Our bet is Trump will try to unleash a big tax cut combined with other stimulus measures. He knows he needs to keep the economy afloat to get re-elected, so support measures seem very likely.

(New York)

Sudden downturns and crises have a knack for exposing underlying weakness in asset classes, and this coronavirus shock looks likely to expose corporate bonds. As investors will know, there are trillions of Dollars worth of bonds hanging on the lower cusp of investment grade at the same time as high yield issuance has surged in recent years. A quick reversal in economic fortunes could quickly cause soaring yields, delinquency, and bankruptcies. This would lead to a sharp drop in bond prices and potential economic disruptions.

FINSUM: Two key points to make on this story. Firstly, the corporate bond market is now worth $10 tn, 10x the size of 2001. Secondly, because many high yield bonds are illiquid and difficult to trade in periods of uncertainty, investors will try to offload other assets instead, which can spread the panic to other asset classes.

(New York)

The bond market looks primed for a big correction, says a top asset manager. Bonds have been surging in price as yields fall because of fears over coronavirus, but they seem likely to have a sharp pullback once the news cycle focusing on the virus moves on. That is the argument coming out of asset manager WisdomTree. According to the firm’s head of Fixed Income Strategy, if we have a sharp “V” shaped recovery, then bonds might see yields jump sharply (and prices fall sharply).

FINSUM: WisdomTree made one other excellent point that is not as obvious. US companies are starting to seek alternative suppliers away from China. As this happens, there is likely to be a transitory pickup in inflation since prices are probably going to be higher from suppliers outside of China. Accordingly, bond markets might also react sharply to a rise in inflation.

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