Markets
(Frankfurt)
In another sign of the deteriorating global economy, bond yields in Europe are once again moving negative. German Bund yields fell in trading recently and are now below zero. The move reflects the recently weak data coming out of Europe as fears grow about a recession there. Europe had seen negative bond yields for a long period until the brief bout of economic strength over the last couple of years.
FINSUM: Can the US be the odd man out in deflecting the global downturn? We have done it before, but this time feels different.
(Washington)
The bond market seems to have blind faith in the Fed right now. Longer-term bond yields have fallen dramatically, a sign that fixed income investors are sure the Fed is not planning any moves. Not only are bonds up considerably lately, but implied volatility is very low. That means investors are discounting both the chance for an inflation increase and an economic downturn. In other words, they think the economy and Fed is going to stay right where it is.
FINSUM: Can you blame them? The economy lingered in what we think of as an investor’s “goldilocks” phase for several years after the Crisis—inflation not too low, not too high, Fed on hold, asset prices rising. It does not seem unlikely we go back into that mode.
(New York)
Right now might not seem like the most important time to buy rate-hedged or short duration funds. The Fed is supposed to be on “pause” after all. However, in our view, now might be a critical time to have some rate hedged assets in the portfolio. The reason why is that yields have pulled back strongly from just a couple of months ago, including yesterday, but given the fact that it is almost purely the Fed which has caused the sharp reversal, rates could swing just as wildly higher if their comments, or economic data, changes. In other words, the bond market looks overbought right now because of Fed comments, but it could easily snap back to where it was in December in violent fashion.
FINSUM: We think this is a time for caution on rates and yields given how strongly the market has reversed over the last couple of months.
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(New York)
There are a lot of good reasons to own Treasuries right now, and a lot of reason to be nervous about them. Let’s take a look. The biggest risks in the market at present are mostly about the budget deficit, which makes Treasuries look weak and inflation likely to jump (as it has historically during such spending). However, there are a lot of positives too. The big one is that the Fed looks ever more likely to adopt a permanently dovish stance as it may be changing its thinking about inflation. Additionally, economic weakness will be bullish for Treasuries, so coming to the end of the cycle is not catastrophic.
FINSUM: The best place to be on the yield curve is clearly at the short end—less rate risk and decent yields.
(New York)
Picking small caps is an art, a point that any serious investor in the space knows. Well, one of the best in the business is giving out tips today and advisors would be wise to listen. Samantha Lau, co-CIO of AllianceBernstein’s AB Small Cap Growth Portfolio is giving out her “rules” for small cap investing. Her fund has an admirable record, rising an average of 20% per year for the last decade, better than 95% of her peers. Some of her rules: “If you think something is wrong, exit and revisit”, “CFOs don’t quit to spend more time with family”, they leave because they see better performance elsewhere or something bad is coming. She continued “A good company is not always a good stock”. Her team uses a rigorous methodology that mixes quantitative and qualitative factors.
FINSUM: These are great tips for any investor, but we are particularly fascinated by the comment about great companies not being great stocks. It is an interesting and underappreciated point.
(Washington)
The market seems to have forgotten about 2013’s Taper Tantrum. The bond markets appear to feel like they are back in the driver’s seat, and seemingly no one expects the Fed to suddenly turn hawkish. A similar set up existed in 2013 prior to the big market meltdown referred to as the “Taper Tantrum”. The thing to bear in mind is that Fed chief Powell has made clear he doesn’t like being bossed around by the White House or the markets, so will not be afraid to be one step ahead of markets in making a sudden hawkish move. It is important to remember then that a survey of economists shows that they expect another rate hike this year.
FINSUM: The Fed is made up of economists, so that survey could have value. That said, we do lean towards the “no further hikes” in 2019 camp.