Bonds: IG
(New York)
Some analysts think that investment grade (IG) bonds might see some very rough times ahead. In fact, one analyst from Pavilion Global Markets says that IG bonds have “virtually no value proposition under any given economic scenario”. Think about the following package of information taken as a whole: 1. iShares iBoxx $ Investment Grade Corporate Bond ETF has lost 6.6% this year; 2. IG yields are well below 6.6%; 3. Investors have been pouring money in IG bond mutual funds and ETFs. So IG bonds are losing value much more quickly than they are yielding, which spells a recipe for disaster to some. According to the same analyst “be mindful of the potential for significant outflows in the days to come”.
FINSUM: We can’t say we agree here. While fixed income as a whole looks fragile right now, the losses have provided room for IG bonds to appreciate as the economy and earnings improve. We do not think it will be all bad news.
(New York)
There might be a great migration in the cards for bonds. While many have spoken of a broad migration into equities that occurred over the last year, a smaller scale change might be about to occur within bonds. Treasuries have been getting hammered, and corporate bonds are appearing increasingly attractive to investors for a number of reasons. Firstly, their durations tend to be much shorter, meaning they have significantly lower interest rate risk—crucial right now. And secondly, with the economy picking up, earnings and business health are looking brighter and brighter.
FINSUM: Aviva Investors thinks corporate bonds have a nice pathway to gain. While rates are working against corporate bonds, the fundamentals are strong. If yields finally stabilize under 2%, it is easy to imagine investors piling into corporate bonds as the recovery strengthens.
(New York)
Yields have been moving all over the place. And while there are daily moves higher or lower, there is a definitive bias towards sharp moves upward. Accordingly, investors need to be thinking about rate hedging. Investors are in a tough place as Treasury yield rises have been causing losses, but the bonds themselves still don’t have high enough yields to be attractive. With that in mind, there are a couple ways investors can go about protecting themselves. Firstly, they can buy floating rate bond-focused ETFs, which give protection but have very low yields. The other opportunity is to buy into bond funds that access riskier corners of the markets, where yields are much higher and durations are shorter, giving less rate sensitivity.
FINSUM: Our favorite ETFs for this purpose are from ProShares, specifically IGHG, which hedges rate risk but still offers the yield income.
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(New York)
Bond market investing hasn’t seemed so attractive recently as rates on even long-term government debt such as the 10-year Treasury hit lows…view the full story on our partner Magnifi’s site
(New York)
One of the best ways to watch the damage to the economy is to monitor the performance of consumer debt. Auto loans, student loans and beyond give a clear indicator of the health of American finances. Right now, the data is looking bad, reinforcing why this might be a long and difficult recovery. According to the WSJ, “Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S … The largest increase occurred for student loans, with 79 million accounts in deferment or other relief status, up from 18 million a month earlier. Auto loans in some type of deferment doubled to 7.3 million accounts. Personal loans in deferment doubled to 1.3 million accounts.” The total of deferments is triple the number from the end of April. Lenders, who have generally been accommodative to this point with borrowers, expect delinquency to soar later this year.
FINSUM: You cannot have 50m people—roughly a third of the US workforce—lose their jobs and not have any repercussions. This is the kind of data that makes stock indexes look rather ludicrous right now.
(New York)
One of the aspects of this bear market that has really alarmed investors is the speed with which the market has rallied from its lows. Huge gains of well over 35% have shocked investors into feeling like indexes are bound to fall again. In some sense that sentiment makes sense since it has happened before, such as in the dotcom bubble. However, according to BlackRock, it is absolutely time to go risk-on, but with a twist. The asset manager says that sovereign bonds have very little upside or protection to offer right now, so instead investors should put their capital into credit and higher-quality equities. “Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities”.
FINSUM: We particularly like the argument about sovereign bonds not offer much right now. With central banks already at their zero lower bound and sovereigns priced very highly, there is just not much to gain and plenty to lose.