Markets
(New York)
Investors seem to have every reason to worry about bonds. Prices are high, yields are low, and low quality companies are accessing easy financing even in the face of an uncertain economic future. With all that said, there might not be any reason to worry at all. Central banks are still gaming the system. From the Fed being really conservative with rates, to the ECB and BOJ doing massive QE, the whole central bank mechanism is conspiring to prop up bond prices in a major way.
FINSUM: As long as that pre-condition of huge central bank support is in place, it is hard to see bonds taking much of a hit.
(New York)
If you think the economy is going to keep humming along, then buy small caps, as they look set to gain the most from that scenario, at least according to Leuthold group. Small caps look likely to benefit disproportionately from the rising inflation and higher appetite for risky assets that accompany a strong economy. That said, small caps have lagged large caps for the last decade, so there is some reason to be skeptical about this call. Accordingly, “If 2020 should prove difficult for earnings growth, we would expect large-caps to maintain their earnings growth superiority”.
FINSUM: We can see the economy continuing to roll, but we have a harder time seeing inflation jumping up. We think the status quo will continue.
(New York)
For many, many years muni bonds have been the go-to for tax-free income. While their yields were lower than conventional credits, there was usually a significant cost-savings by investing in the bonds because of the lack of taxation. However, the muni market is so over-bought that it is very difficult to find bonds where that is still the case. Prices have moved yields so low that there are virtually no savings versus Treasuries. 2019 saw muni bonds experience their highest inflows since 2009, and according to Morningstar “For most taxpayers, there’s no longer a significant yield advantage for muni funds after you take taxes into account”.
FINSUM: Weak yields and no savings, which is going to push investors to buy ever riskier munis. Boom time coming for lower-rated credits?
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(New York)
Ban of America says it is a very good time for investors to buy TIPS, or Treasury Inflation-protected securities. The bank thinks inflation expectations are going to rise this year and they are bullish on long-dated TIPS. The call is notable as many fund managers lost money with similar bets after the Crisis, when many thought inflation would jump alongside QE. This time may be different as the Fed has explicitly said it would let inflation run hot to compensate for the slow inflation we have had for the last decade.
FINSUM: We just don’t see inflation rising much in the near term. There are still a lot of worries about the economy. We feel like 2019 would have been the year for big inflation worries/rises, but it didn’t materialize.
(New York)
There is big risk to the muni bond market that you are probably aren’t thinking about. That risk is how increasingly frequent weather-related calamities are befalling US cities as the climate changes. The market is already starting to price these risks, and according to BlackRock, many current muni bond issuers could see 1% knocked of their economic output. According to the head of muni bonds at BNY Mellon, “The risk has been identified by market participants … Looking at the severity of storms picking up . . . it will start to be factored in”. When choosing bonds, investors need to start demanding or checking on plans from issuers. “What plans are they making? Are they hardening their infrastructure . . . are they trying to insulate central services? If they’re just stating the obvious, that’s not sufficient”, says BNY Mellon.
FINSUM: This is an important consideration for all those that hold munis. Think of the weather-related calamities that have happened lately and consider the implications (e.g. Houston).
(New York)
Gold has been surging on the back of fears of rising tensions between the US and Iran. The metal just hit $1,600 per ounce, its highest level in almost seven years. However, what is going to drive gold once all of this fear calms down? Gold has been known to spike in times of fear, but the positive effect on its price usually fades quickly. What will really drive gold is the same thing that always does: Treasury yields and their outlook. Ever since the Crisis, the relationship between gold and Treasury yields has been pretty strong. When yields rise, gold falls.
FINSUM: We don’t see a lot of upward pressure on rates right now, which taken on its own might make one think gold has a solid path ahead of it.