If the default rate proves lower than the market has discounted, then high-yield bonds could realize greater upside potential. Meanwhile, the higher coupon rates provide some downside protection. We think institutional investors will begin re-entering the market in December, which could spark an early ``January effect''--a surge of buying as managers reset their portfolios for the coming year. We expect the market to quiet at year-end, and believe mutual fund investors are likely to come back in January. With so much cash waiting on the sidelines, the high-yield market could be positioned for a significant rally. Of course, it looked that way last year, too.
Our outlook for calendar year 1999 calls for gross domestic product growth of about 3% and inflation around 2%. We do not see any signs of recession. We expect the long bond to remain in a 6.00-6.10% range. To sustain a rally, however, we would have to see Treasury yields stabilize--if Treasurys continue backing up, the high yield market will have to back up too.
Mr. Flipper_58, Could you please explain to me how the following factors affect the NAV of FAX: a. Rate of exchange (A$ vs US$). b. Direction of interest rates in Australia & in the U.S. c. Inflation rates in both countries.
There are a number of folks that could answer probably better than I but here's an overview.
The NAV is effected by: 1)exchange rate.....the fund owns Aussie bonds, etc...since we want $ in US dollars the fund must exchange the interest and and bond proceeds from the AUD the $US. The exchange rate goes up and down....so if the AUD goes down relative to the $US then the portfolio, as valued in $US will go lower even though the Aussie value of them might have not changed. 2)direction of rates....first as you may know if bonds yields go up the price of exisitng bonds will drop to compensate for that higher yield. If rates are climbing, bonds portfolio's values are dropping. Inflation drives interest rates up or down. Rates are climbing in both countries. Depending on the rate of increases relative to each other (Australia versus US) it can have an effect on the countries currency. If rates are HIGHER in Australia than the US chances are that investors will want to be invested in Australia pushing up the value of their currency. Also the countries balance of trade (Import versus export) deeply effects a counttries currency. If countries import more than they export, this means when exporters sell AUD's to exchange back into their own currency it forces the value down. We've been lucky in the US and many of our major creditors(Japan, China) have left their money here versus selling and converting back to their own currencies. It's difficult to see how long this will continue. Australia too, has been running record trade imbalances(deficits) putting pusher on their currencies.
To get really complicated, Gov't policies must balance their own interest rates to attract foreign capital and also try to control inflation in their own country. In the US, the FED is lucky that so much of our trade deficit money stay here...most other countries are not so lucky and must lock step rates up with the US in order to keep their interest rates competitive enough.