Markets

(New York)

Investors need to face reality (not that they aren’t), this Fed is more hawkish than any since the Crisis, and despite the market turmoil there will be yet another hike before the end of the year. Rates will keep rising so long as the economy stays strong. That means investors need to prepare. They have mostly done so by fleeing bond funds, but that may not be wise, as there are some very attractive funds that can help offset interest rate risk. For instance, check out the ProShares Investment Grade—Intr Rt Hdgd (IGHG) and the iShares Interest Rate Hedged Corp Bd ETF (LQDH). IGHG is particularly interesting because while both funds go long corporate bonds and short treasuries to produce zero duration, IGHG holds less BBB rated bonds and has a higher quality portfolio, all of which has let the fund appreciate this year even as rates rose strongly.


FINSUM: There are some very solid and creative bond funds out there to help offset rate risk while still earning decent yields. Given where equities are right now, these seem like good buys.

(Chicago)

In 2010, Meredith Whitney, famed market analyst, made a bold call that still haunts her and the muni market to this day—that there would 50 to 100 sizable defaults in the next year. The call, which came on 60 Minutes in 2010, led to a major backlash by the muni market. Besides Detroit and Puerto Rico, which were widely forecasted, her predictions never came true, or at least were certainly far too early. To this day, many of the problems that haunt the muni market, like shrinking populations in indebted areas, are still definitively long-term issues that are not going to immediately take down the market. Even the pension deficit is not as bad as many perceive, with a 71% funded ratio on average (economists say the optimal number is 80%).


FINSUM: The muni market gets a lot of bad press, mostly because of the handful of dire situations, but on the whole it has been quite steady.

(New York)

There is a significant minority of investors who have a very particular worry about the Treasury market right now. That worry is that foreign demand for Treasuries is slumping, which could cause a big sell-off or sustained period of losses. The potential issue has two parts—the first is that a huge amount of Treasury issuance is set to take place, the second is that foreign holdings of Treasuries are at their lowest in 15 years. The combination of seemingly low demand with high supply is making some think the bonds could be in for a rout alongside forthcoming auctions. JP Morgan strategists estimate that yields on Treasuries will rise 7-8 basis points for every $200 bn of Treasuries sold. Foreigners hold $6.3 tn of Treasuries.


FINSUM: This could be a problem, but given that central bank reserves have not been growing, it makes sense that foreign Treasury holdings haven’t either. Foreign governments still need Dollar liquidity, so there is a built in demand for Treasuries which we think won’t simply evaporate.

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