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.
JP Morgan thinks bonds are the best of a bad bunch. That is essentially what JP Morgan is saying about the asset class. The investment bank says that bonds are not in a bubble, though there are no good discounts either. JP Morgan, which is the world’s largest underwriter of bonds, says that despite the 100 bp dive in Treasury yields, bonds are not a bubble ready to burst. The bank thinks the Fed will stay on hold, not cut, until the end of 2020 given the increased pressure the trade war will put on the economy.
FINSUM: Despite the speed with which the bond market has seen yields fall, it is relatively hard to imagine them rising back to over 3% any time soon (even if China dumps its holdings). Thus, we generally agree with JP Morgan’s assessment.
The trade war has really taken a toll on Treasury yields. The tensions between the US and China have made investors bearish about the economy, sending Treasury prices sharply higher, and steepening the inversion. Treasury yields just hit their lowest point since 2017, with ten-year yields falling as low as 2.27%, light years from where they were in the fourth quarter. Even the 30-year is only at 2.7%.
FINSUM: Yields are going to move in step with the trade war. We think the general trend will be downward given the market anxiety and the fact that the Fed is likely to be more dovish.
Ten-year yields are low, very low, compared to where they were just a few months ago. Recently poor news on the trade front has sent yields spiraling lower, all the way down to 2.30%. The speed of the rally in Treasuries also prompts the interesting question of whether China weaponizing its Treasury holdings even matters. Yields have fallen so steeply, and there is so much momentum supporting the bonds, that even if China were to dump its holdings, it is hard to imagine that yields could jump back to even where they were a few months ago.
FINSUM: Let’s say hypothetically that China dumps its Treasuries. How far would ten-year yields rise? Maybe to 2.8%? We wouldn’t even be back to where we were in the fourth quarter, and it is hard to imagine that move having much of an impact on the economy itself.
The big rally in ten-year Treasury bonds has created a worrying situation in the bond market—a steepening inversion. Despite the broad based rally, the negative spread between ten-years and three-month yields actually grew, as did the spread between two- and thirty-year bonds. Oil also plummeted 5%, as did the Dollar, a reflection of traders’ bets that the US is likely headed for a downturn and easier monetary policy.
FINSUM: The current inversion could just be a product of markets flows dictated by the trade war. What is worrying is that negative spreads actually widened instead of just staying flat, which adds more weight to the inversion-recession story.
China has a massive hoard of US Treasury bonds worth over $1.2 tn. Many have speculated that as part of a trade war with the US, Beijing may flood the market with these bonds in an effort to enforce pain on the US economy. Recent market data shows it is likely already happening. China recently dumped $20 bn of Treasuries, a move that cannot be accounted for as part of normal market flows. The move was China’s largest sale in more than two years. The sale came in March, just before US-China trade tensions were again heating up.
FINSUM: Our view is that China is more likely to threaten doing this and perhaps do some in small chunks than actually pull the trigger. However, even if they do, yields have fallen so far recently that it is hard to imagine they would rise much beyond where they were a few months ago.