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Generating income continues to preoccupy many investors, but of course they want growth too. Investor's Business Daily's ETF Strategies special report shows how you can get the best of both worlds in your portfolio, particularly in an environment of rising interest rates.
While short sellers in U.S. equities have an appetite for destruction brewing in the stock market, the latest volatility is also fueling an appetite for bonds as the Dow Jones Industrial Average fell over 500 points before gaining back its losses on Monday. A 507-point decline was reduced to a mild gain as of 2:30 p.m. ET in Monday's session, but those market oscillations are the types of swings that are paving the way for capital flows into fixed income. With the yield in government debt like the benchmark 10-year yield falling, it suggests the move towards safe-haven assets to escape the volatility--a trend that could also see long duration Treasury yields fall to record low levels in the 1 percent territory.
Asia bonds appear to be mirroring the U.S. bond market with respect to concerns surrounding BBB-rated debt falling into high-yield territory, which could trigger a global bond crisis. When risk-on sentiment was at a peak during the thick of the extended bull market, risky less-than-investment-grade bonds were in vogue with their attractive yields, particularly in a rising rate environment, but BBB bonds that are on the cusp of high yield status could be facing a liquidity crisis, according to a recent CNBC report. As the latest bouts of volatility have been racking the stock markets, it has also affected the bond markets, particularly liquidity–the ability purchase and sell an asset within a reasonable amount of time.
The threat of a flattening yield curve caused the capital markets to fret over an economic slowdown, but one trader saw a $1 million opportunity in the bond market, particularly the iShares 20+ Year Treasury Bond ETF (TLT) . In addition to trade war worries, rising Treasury yields came back to spook the markets where the 3-year note exceeded the 5-year note earlier this week, bringing back the notion that an inverted yield curve could be signaling a forthcoming recession. Worries over an inverted yield curve came back into focus on Tuesday as the Dow Jones Industrial Averaged declined 799 points.
At the height of the extended bull market, risky less-than-investment-grade bonds were in vogue with their attractive yields, particularly in a rising rate environment, but BBB bonds that are on the cusp of high yield status could be facing a liquidity crisis, according to a recent CNBC report. As the volatility seen has been racking the stock markets as of late, it has also affected the bond markets, particularly liquidity--the ability purchase and sell an asset within a reasonable amount of time. BBB bond markets are especially susceptible because institutional investors, who carry war chests full of capital that aid in liquidity, aren't able to invest in these bonds if they become high yield or "junk" issues.
Benchmark long-term Treasury yields rose while short-term yields fell as investors were hanging on every word of Federal Reserve Chairman Jerome Powell’s speech at the Economic Club of New York on Wednesday when Powell said that rates are “just below neutral,” signaling a less aggressive rate-hiking policy moving forward. “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth,” said Powell. Powell noted that the economy is “near max employment, price stability” and major asset class valuations are “not far in excess,” which could mean there may be more room to run for U.S. equities.
Fixed-income bears could be leaving the bond market picnic, according to a Reuters report that said hedge funds have recently backed off their bearish beats as U.S. equities continue to march forward on shaky legs while Federal Reserve officials speak with dovish tones. The latest hedge fund moves come even though the general consensus in the capital markets is that a rate hike is slated for December, but the decision will also hinge on data, judgement and a little extra, according to Federal Reserve Vice Chairman Richard Clarida. "A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment — and humility! — to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives," said Clarida, as he delivered a speech to New York bankers.
The concept of of environmental, social and governance (ESG) investments may be struggling to break into the mainstream, but it may be turning a corner as demand for ESG fixed income products exceeded supply, according to new research by Cerulli Associates. The report revealed that inflows into ESG fixed-income products surpassed $11.4 billion the last two years, but a shortage of benchmark indexes that measure ESG-focused criteria makes it difficult for its inclusion in the asset class. “Cerulli research shows an increase in demand for ESG in all segments of the fixed-income market,” said André Schnurrenberger, managing director for Europe at Cerulli, in a press release.
As such, an emerging theme that rose out of the volatile October was a need for more short duration exposure, according to Kari Droller, Vice President of Third-Party Mutual Fund and ETF platforms at Charles Schwab. The shift to safety in short duration debt came after Charles Schwab said that during the first three quarters of 2018, investors' focus was scattered, including capital allocations into U.S. fixed income assets. "We've noted some weakness in international fixed income due to the strengthening dollar and low global interest rates," said Droller.
The 2018 Midterm Election provided the necessary rally for U.S. equities after washing investors through October's volatility machine, but this continues to persist in the capital markets as the Dow Jones Industrial Average began Monday with a 600-point loss as it struggles to recover on Tuesday--a sign that investors should give bonds a closer look--fixed-income exchange-traded funds (ETFs) in particular. The sell-offs in October was partly to blame as a confluence of these factors could signal that the environment for fixed-income investors will only get more complex. Maybe, but maybe it isn't so wise for investors to dismiss bonds outright," wrote Goldberg.
Infrastructure spending—it’s one of the few things, if any, that Democrats and Republicans can agree on, but with the newly-divided Congress, can this fuel municipal bonds exchange-traded funds (ETFs) ...
October 2018 has been one to forget for U.S. equities, but in a survey by the American Association of Individual Investors, it wasn't much better for bonds as exposure to fixed-income dropped to a 10-year low, reflecting the lockstep move both asset classes made during that month of extreme volatility. Things weren't much better for the S&P 500, which followed the Nasdaq into correction territory and fell by 7% in October--its worst month since September 2011. The Dow Jones Industrial Average fell 1,300 points or 5%, which hasn't happened since January 2016. Investors have been spooked by copious amounts of volatility after a decade-long bull run that has seen the growth fueled by FANG (Facebook, Amazon Netflix, Google) stocks dwindle as the technology sector fell into correction territory.
"Red October" and "Volatile October" are just a couple of monikers the past month can be aptly named after the capital markets were fueled by sell-offs. The bond market saw its fair share of doldrums as a result of the whipsawing volatility as Treasury yields reached its own highs--a boon for TMV. As bond prices were getting depressed, a movement into short duration by dogpiling into certain bond ETFs for the purposes of hedging benefitted TMV.
During a volatile October month, traders headed for the entrance to bond exchange-traded funds (ETFs) just as often as they headed for the exits. In particular, trader volume soared the most in the iShares Core US Aggregate Bond ETF (AGG), which saw $2.6 billion in withdrawals or 5% assets under management. Next, the iBoxx $ Invmt Grade Corp Bd ETF (LQD) experienced an outflux of 6% of its assets under management.
The month of October wasn't only a signal to stock investors that due diligence is necessary when screening for quality U.S. equities that can be resilient during times of volatility, but it also put fixed-income investors on notice that the same strategy is necessary for the bond market. A combination of rising interest rates, a healthy injection of government debt into the markets and other external factors has made for a more intricate bond market. "A transition is under way as monetary policy normalizes, liquidity ebbs, and bouts of volatility are roiling the market.
Investors can breathe a sigh of relief now that October is coming to a close--a forgettable one for U.S. equities. Needless to say, October hasn’t been kind to U.S. stocks as the technology sector, in particular, has been getting trounced with the Nasdaq Composite falling by 9.2% in October, making it its second largest decline since it fell 10.8% back in November 2008. With sectors like technology getting roiled by October's downpour of volatility, tech-centric ETFs like the Vanguard Information Technology ETF (VGT) and Technology Select Sector SPDR ETF (XLK) were obviously hit hard. "The surprising thing is some of the unloved ETFs actually did really well," said Lydon.
Gone are the days when investors can simply rely on the heavy hitters that sparked the decade-long bull run, such as the FANG stocks (Facebook, Amazon, Netflix, Google) to propel them into profitability. The recently-crowned 2018 World Series-winning Boston Red Sox found their most valuable player in a 12-year journeyman and in today's market volatility, investors can do the same--dig deep into their roster of investment opportunities with due diligence in order to find their most valuable performers. Needless to say, October hasn’t been kind to U.S. stocks as the technology sector, in particular, has been getting trounced with the S&P 500 following the Nasdaq Composite into correction territory last week before pulling itself out in Tuesday morning’s trading session.
Benchmark Italian bond yields rose on Tuesday after the European Commission, the executive arm of the European Union, told Italy that its original draft budget proposal was rejected. The European Commission Vice-President for the Euro and Social Dialogue Valdis Dombrovskis said in a press statement there was no alternative but to reject the initial proposal as is. This marks the first time that the European Commission rejected a draft budget proposal by a member country, which helped send the benchmark Italian 10-year bond to its current level of 3.596%.
Benchmark U.S. Treasury yields nudged lower after the Labor Department revealed that the number of job openings in August hit a record high. Furthermore, the latest report by the Bureau of Labor Statistics showed the unemployment dropped to a 50-year low of 3.7% percent, while average hourly earnings rose by 8 cents, which matched the gain in August. The latest jobs data comes as Treasury yields have been climbing, causing investors to flock to shorter-duration debt issues as opposed to those with longer maturities.
For the month of September, the Labor Department revealed that the core producer price index (PPI) increased by 0.2%, which was in line with expectations from a Reuters poll of economists. Furthermore, the PPI rose 2.5% in the 12 months through September, which also matched expectations. “This latest inflation data corroborates our view that the Fed is likely to move ahead with another rate hike in December, bringing this year’s total to four,” economists at Oxford Economics wrote.
As the bull market continues its forward momentum, the appetite for risk is following close behind as bond buyers are purging government debt for higher yields in corporate bonds of investment-grade quality. ...
Compared to their longer duration counterparts and U.S. equities, short-term bond strategies have been an option for fixed-income investors seeking a return in today's rising rate environs, while also avoiding the volatility of the extended bull run in the stock market. While trade wars continue to cause bouts of volatility in the capital markets, short-term bond funds can be the elixir for risk-averse investors who want to minimize the impact of volatility and still earn a return given the rising rate landscape. Bonds with a shorter duration also reduce the exposure to inflation, which can tamp down the returns of fixed-income investments. In addition, bond giant Pimco found in an analysis that these short-term strategies have produced an annualized volatility of less than 1% over a 10-year period--compare this to stocks, which have produced a 15% annual volatility and 10% for long-term bond strategies.
Market mavens like hedge fund billionaire Ray Dalio and just recently, David Tepper, founder of hedge fund Appaloosa, have likened the current state of the bull market to a baseball game that is in its ...
As summer draws to a close, it’s that time again for students to head back into the classrooms and hit the books. For fixed-income investors, it’s business as usual as the quest for profitability in the ...
The Federal Open Market Committee is in the midst of a two-day meeting to discuss their next moves on monetary policy, which will include a policy decision announcement set to take place on Wednesday. ...