Clutching at the straws of yield hunting
Singapore Sales Trader
Many anticipate that the market rally may still have room as US markets have pushed towards new record heights as the second-quarter earnings were boosted by robust corporate results. The bond market had taken off on the expectation of a 50bps rate cut which is naturally good for borrowers. But even after the market pared back the odds and changed the pricing of base case to a 25bps rate cut, there is still room for some disappointment on the scale of the Fed’s dovishness, and as a result some widening in the yields. The US economic data since the Fed dialed in a rate cut for July has also been impressive.
In traditional investing, when stock prices rise, havens like the treasuries and precious metals will fall. On the contrary, with the correlation turned positive, we saw that these two asset classes moved in sync.
Investors are piling into safe-haven bonds at a record pace. This formed a signal that caution remains despite stocks pushing toward records. Honestly speaking, there is a lot of uncertainty over how many times the Fed will cut rates this year, with another 25 bps as the baseline, but the dovish end of expectations is more aggressive.
In the current situation, higher risk does not mean higher returns anymore. High yielding debts are seeing negative yields too. The reason behind such a swing in the debt market was driven by huge amount of investment grades entering negative territory, where yield hunting persists.
Exchange-traded funds (ETFs) and mutual funds tracking bonds posted $12.1 billion of inflows for the week ended mid-July, the 28th consecutive week of inflows. The figure brings the total so far this year to $254 billion, on pace for a record $455 billion in 2019, according to analysis of EPFR Global data by Bank of America. That compares with $1.7 trillion in bond inflows over the past 10 years, the bank said.
Besides the inflow, there has been plenty of discussion about the Fed needing to “match” with other central banks, whose policies have led to $13 trillion in bonds with negative yields. As shocking as that might seem, especially when developed economies are not in recession, this is the new reality staring at us.
With all eyes and glaring attention on the Federal Reserve’s policy meeting on 31 July, Treasuries got more expensive, partnering with stock prices in the US market. Switching our mind set back to the investment basic, even way before the bubble.com era where 60/40 rule was the rule of thumb. In the instant of low volatility environment, well-balanced portfolios outlasted, by taking some fixed income-like risk as opposed to traditional fixed income captures the structural opportunities in the equity market.
For the 11th week, fixed income ETFs witnessed net inflows – taking in another 1.6 billion of the ETF markets. This evidently suggested that investors anticipate that central banks could continue to lower borrowing costs this year, that could drive the yields across the front and long end lower. The pick-up in demand has been an attractive play, including the price changes and decent dividend (average 4% - 5%) on the funds, which may be worthwhile to remain diversified and crunching some positive yields.