Markets
(New York)
With all of the volatility of the last months, bond ETFs are taking on a new life. As an asset class, bond ETFs have surged in popularity in recent years as a much easier and cheaper way of accessing bond market liquidity. Recently, bond ETFs have seen their role morph. Whereas they have often been seen as a safe haven from periods of volatility, they are now being used as a risk management tool, says the head of iShares U.S. Wealth Advisory Product Consulting at BlackRock.
FINSUM: So many of the newer bond ETFs are designed to thrive in volatile markets, not just provide a low volatility safe haven. This means they are more of a proactive than reactive product.
(New York)
The market is overly reliant on a rate cut, say UBS and Goldman Sachs. Both banks think investors are banking too strongly on the Fed cutting rates. The market is currently forecasting three 25 bp rate cuts by the end of the year. Treasury markets have surged, but too far says Goldman. UBS believes “Markets now imply that the Fed will cut rates by around 70 basis points this year and 35 bps next year. We find this excessive … We believe it would take a recession to provoke the magnitude of rate cuts currently being priced by the market, and this remains unlikely in our view”.
FINSUM: We do not believe the Fed will cut rates this sharply unless there is a recession, but maybe that is exactly what markets are expecting (just look at the yield curve).
(Washington)
Investors have been unsure of how the Fed would handle the trade war. Recent minutes from the Fed showed no indication that the central bank was thinking of cutting rates even though the market expects it. However, the silence has finally been broken as Fed chairman Powell announced yesterday that the trade war is on the list of the Fed’s concerns and that the central bank would act to protect the economy from its fallout. In his own words, Powell said the Fed would “act as appropriate to sustain the expansion”.
FINSUM: We took this as a pretty strong affirmation that the Fed is watching the trade war situation closely and is ready to act. Markets liked it.
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(New York)
There has been a lot of speculation about whether there may be rate cuts this year. The Fed has been less than clear about this possibility, mostly indicating it just wants to stay put for the year. The Treasury market has been very vocal, however, with investors clearly indicating they expect rate cuts over the second half of the year. Now JP Morgan is weighing in, saying that the Fed is likely to cut rates twice by the end of the year, a prediction which precisely matches what markets are calling for. The ten-year Treasury yield fell below 2.1% recently.
FINSUM: We think the cut will come as a function of how the trade war plays out. Trump is certainly pushing the Fed’s hand, but we expect the central bank will remain “data dependent”.
(New York)
One of the best indicators of the health of the economy from the last several years has been the strength of the labor market. In particular, low unemployment and jobless claims have highlighted a tight labor market traditionally associated with a strong economy. However, what if the opposite was the case? Recent academic studies show a new recession indicator: full employment. Historically, downturns have typically started about 12 months following the lowest unemployment rate reached in a cycle.
FINSUM: We are currently at 3.7% unemployment, which is VERY low. It seems like the economy is exactly in the “12 months from a recession” position, at least according to this research.
(Dallas)
If you are looking for for a safe place to earn some yield in munis, look to Texas. Specifically, the Texas Permanent School Fund, a heavy weight in the muni market that backs $80 bn of debt. The fund has a triple A rating from multiple agencies and is one of the safest bets in the market. The bonds average a 1.9% yield, which is quite strong for the muni market, especially considering the average triple A only yields 1.7%.
FINSUM: This seems like a very strong credit, and one with a surprisingly good relative yield.