Displaying items by tag: yields

(Miami)

FINSUM is at the Inside ETFs conference in Hollywood, FL this week, and we wanted to bring you a little live coverage. Yesterday, there was a major session at the event discussing the outlook for fixed income. The consensus was that even though the Fed has paused, there is now way to tell when rates may rise again. Further, while China’s economy looks weak right now, that could turn around rapidly in the event of a trade deal with the US. Finally, all of the five panelists discussing fixed income said the ”liquidity mismatch” between ETFs and fixed income instruments is overblown and that there is not nearly as much to worry about as some think.

FINSUM: Fixed income’s outlook is murky right now. On the one hand, the Fed has paused, but on the other, rates could start rising anytime. On balance, we do think the risk-reward is slightly in favor of a shorter-duration long position.

(New York)

Stock investors and bond investors are showing a big disconnect right now. That mismatch in sentiment could cause some big losses. Fixed income investors have been buying bonds aggressively, keeping yields pinned at low levels and the curve very flat. However, equity markets have been rallying strongly, which will alleviate some pressure on the Fed, allowing them more margin to raise rates again. However, the bond derivatives market shows the market is betting there is a 98% chance rates are in exactly the same place as now in one year’s time.

FINSUM: Bond investors are too comfortable with the Fed right now. Powell et al have been quite hawkish for awhile now, only very recently backing off. We don’t think it would take much to get them back on track, and the equity market is paving the way.

(New York)

Dividend stocks have not been looking as appealing lately because of the rise in rates. Yields on even short-term assets now look much more attractive than the near zero coupons that were being offered a few years ago. That said, dividend stocks have a special niche within a portfolio, and it is not hard to find some very solid stocks with good yields. One of the best ways to buy dividend stocks is through an ETF that can select a large and balanced group. With that in mind, here are three ETFs to do just that: ProShares Dividend Aristocrat ETF (NOBL), the SPDR S&P Dividend ETF (SDY), and the Vanguard Dividend Appreciation ETF (VIG).

FINSUM: With the Fed showing dovishness on rates, the outlook for dividend stocks has suddenly brightened.

(New York)

On the surface of it, this does not seem like a good time to buy bank stocks. Bank shares have done really well in the last month, but the Fed’s sudden and dramatic dovishness on rates would seem to be a catalyst for a move lower in bank shares. Countering that theory stands Mike Mayo from Wells Fargo, an equity analyst who thinks the picture of bank shares looks better. Many big bank stocks are trading at relatively cheap 10x p/e ratios, with yields of 3% or more. According to Mayo, “The negative sentiment has created an opportunity with uniquely attractive valuations”. Banks are also expected to do a large amount of buybacks in 2019, with some like Wells Fargo and Citi, expected to spend more than 100% of earnings on dividends and buybacks.

FINSUM: Banks do seem like a good value play. But at the same time, they have been trading for years more on a macro basis. Which side seems more realistic? Stick with the trend—bank stocks now have a weaker outlook because of the Fed.

(Washington)

Those nearing retirement are likely comforted that rates have risen and returns from fixed income are much higher than the near zero coupons of the 2008-2015 era. Pension funds are finding it easier to meet their return goals, and generally speaking, the environment for retirees is on much better footing. However, the risk of a return to zero interest rates in the next recession seems very high, according to independent research. The Fed tends to raise rates slowly and cut them quickly, so the threat of a return to zero rates seems very plausibe the next time the economy goes into reverse (maybe 2020?). Even the Fed staff itself acknowledges this likelihood.

FINSUM: The risk of a protracted return to zero interest rates is not inconsiderable and is likely one of those late night stress points for those nearing retirement (and their advisors!).