The late-February spike in U.S. Treasury bond yields sent ripples throughout the global markets. As yields surged to the highest level in a year, stocks and commodities sold off sharply, while the dollar rallied.
There is hope that economies will see a more sustainable and robust recovery this year, given unprecedented levels of monetary and fiscal stimulus and as more individuals are vaccinated against COVID-19. But one question for investors is what happens next—will inflation and higher interest rates be a consequence?
In the near term, markets should not be too worried about a possible spike in demand driving up inflation and interest rates, causing asset prices to fall across the board. But longer-term inflation risks are skewed much more to the upside than many investors and policymakers seem to realize.
A technical indicator with a reliable history is signaling that 30-year Treasury yields will soon decline.
Yields have jumped so much, in fact, that they’re giving stocks a serious run for their money. The 10-year yield is now higher than the S&P 500 dividend yield, which may have added to the selling pressure that cost stocks close to 2.5% yesterday.
What normalcy will it be? I don’t expect to simply go back to the way things were. The economy as it was structured in December 2019 is gone forever. The world is different now. The economy will be different, too.
Valid until the market close on March 31, 2021.
The S&P 500 closed February with a monthly gain of 2.61% after a loss of 1.11% in January. At this point, after close on the last day of the month, four of five S&P 500 strategies are signaling "invested" — Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US ETF (VEU), Vanguard REIT Index ETF (VNQ), and Invesco DB Commodity Index Tracking (DBC) — unchanged from last month's quadruple "invested" signal.
Despite the recent weakness in equities, Raymond James CIO Larry Adam expects positive stock growth over the next 12 months.
We hope you enjoy Harold Evensky's latest NewsLetter.
The Queen’s Gambit miniseries helped propel Netflix to a winning earnings report last quarter, but in fact the chess strategy it is named after has helped propel chess players to winning games for decades.
Our positive 2021 economic outlook, combined with better-than-expected company fundamentals, supports strong credit performance and spreads.
The latest Conference Board Leading Economic Index (LEI) for January was up 0.5% from the December final figure of 109.7.
Today’s low bond yields and high equity valuations have led many to jettison the traditional 4% initial safe-withdrawal rate assumption. But I will show that the optimal “safe” withdrawal rate depends considerably on the retiree.
Target date funds should be designed to reduce the risk of rash selling.
The unprecedented $9 trillion rescue mission by central banks to haul the world economy from its coronavirus recession is being tested as rising bond yields and inflation bets threaten their ability to keep borrowing costs down.
The GMO Asset Allocation Team has released its latest 7-Year Asset Class Forecasts through January 2021.
About a week ago, an unprecedented polar vortex descended upon the southwestern United States. The deep cold forced power plants in Texas to take production offline, leading to rolling blackouts and leaving more than four million households without power.
The obstacles to higher yields in the world’s biggest debt market are slowly melting away.
U.S. stocks have the highest CAPE ratio of any global equity market, but they are still the place to invest. But the inventor of that metric, Robert Shiller, says that stocks are indeed risky.
Political change, continued fiscal support will drive municipal markets in 2021, although outcomes are likely to vary.
As COVID-19 vaccines roll out and resrictions lift, a US economic rebound could lead to tighter Federal Reserve policy and higher yields. Municipal bond investors may worry about how rising yields could hurt their portfolios.
Many investors think there are only two options in a market where participants have become overly exuberant, either 'I want in' or 'Get me out.' Our strategies are more nuanced, and we believe fit better with what we expect to transpire.
Rather than going deep into one theme, this week we will do a “Random Thoughts” from the Frontline. Today we will cover several topics in shorter form: valuations, infrastructure, the debacle in Texas, and a lot more.
In late 2020, a new kid emerged on the bargain-of-the-decade block. UK stocks, and notably UK value, reached very cheap levels relative to value stocks in other developed economies. Today, UK value remains at remarkably low valuations relative to most of its fundamentals.
Apart from some high-profile downgrades, the muni credit markets finished 2020 buoyed by breakthrough vaccines and signs that state and local tax collections were better than anticipated.
It’s tempting these days for some investors to question the role of fixed income in portfolios. After all, real yields have plunged, potentially leading to less income today and smaller capital gains tomorrow.
I offer 15 explanations for the bubble in stock prices and a single explanation for the one in bond prices. Those bubbles could deflate for any of 10 reasons I also identify, severely diminishing the retirement savings of baby boomers.
Is inflation coming? At some point, yes. We know what generates inflation, and we will be watching for it. Until then, we do not expect a wildfire in inflation land.
A brief monthly update on what's happening in the municipal bond market.
U.S. Treasury yields rose to the highest since February 2020 and are at risk of climbing further, as investors start to factor in the full economic impact of a stimulus plan totaling as much as $1.9 trillion.
The object of the game was to get to the finish line first and then become the leader the next round. The stock market has its own game of “Simon says” and that is in the mall property world.
Despite questions over financing the European Union’s (EU’s) new Green Deal, the green transition is now under way.
To say the market is bubblelicious is a bit of an understatement given that retail “investment” in call options and penny stocks is quite literally off the charts, dwarfing numbers we saw in 1998-2000.
Cast a gaze across global bond markets and it’s a sea of calm. Yields are close to record lows, volatility is nowhere to be seen and central banks are still ploughing trillions of dollars into the economy to help foster a recovery.
Short-term interest rates are approaching zero percent and will likely be negative shortly. The culprit is an unusual circumstance at the U.S. Treasury.
It isn't over and financial markets don't accept that yet. I realize suggesting anything negative about the virus is misanthropic, but the truth matters and the optics are misleading.
With U.S. equity valuations very rich by historical standards, many – including Jeremy Grantham, Rob Arnott and Vanguard – are predicting emerging markets to excel. I’ll examine the case and give my thoughts on how to invest in emerging markets.
Factor-based models are often criticized for data mining. One way to address that charge is with “out-of-sample” testing over longer time frames. But that takes time. New research provides an alternative out-of-sample test – using emerging-market bonds.
If, however, the pandemic continues into summer, it will mean the Gripping Hand is still squeezing us. Employment won’t recover and more small businesses will fail. This relief package, as large as it is, may prove necessary and maybe even too small.
Rob Arnott: “There hasn’t been a better time to be a value investor at any other time in my career. I look back at the tech bubble and I never thought I would see valuations stretched the way they were then. We're back to that, and then some." We invite you to revisit “Reports of Value’s Death Have Been Greatly Exaggerated” now published in the Financial Analysts Journal.
Hope is high that economic growth will accelerate as more people are vaccinated against COVID-19, but so far economic data has been lackluster. Meanwhile, bond investors are expecting inflation despite signs that the economic recovery’s momentum may be stalling. Why does everything seem so disconnected?
Recent volatility and high valuations underscore the need to be selective, but risk premiums still justify a moderately pro-risk stance, in our view.
Investors awash in optimism have bid up equities to their best start of the year relative to bonds in almost a decade.
Yields on two-year Treasury yields briefly printed a record low under 0.1% on Thursday as cash trading got underway in London after a holiday in Asia.
This is a new type of exchange-traded ETF that is built differently from a traditional ETF.
Having strongly underperformed the wider stock market in 2020, high-dividend stocks have shown early signs of a rebound in recent weeks.
Our Fixed Income CIO Sonal Desai shares her investment views and strategies for the post-pandemic recovery. She explains why inflation looks likely to gain steam, and how the balance of fundamentals and valuations become especially crucial today when looking for attractive returns in fixed income.
I don’t say this often, but Fed Chairman Jerome Powell is wrong. Regular readers of our investor letters and other publications will recall that we regularly cite Chairman Powell as doing the best he can with the levers he has while arguing correctly for others to do their part.
Relative value currently favors floating-rate loans over high-yield bonds.
Rick Rieder and team think that today’s potent policy cocktail holds important implications for the path of economic growth, markets and the value of a dollar.
Fortunately, human behavior has a history of repeating itself at extremes. The worst buying decisions are made at the top. Just like bonds, the convexity is true when yields rise going forward. It’s a slippery slope and could be vexing.
For the first time in a long time, there’s a conversation on Wall Street about when equities might start to feel the heat from reflation signals in the bond market.
It was a dinner conversation with former Federal Reserve Chairman Ben Bernanke in early 2020 that convinced Cesar Perez Ruiz that the golden age of bond investing was over.
Inflation is not dead. It is not gone. It has not been tamed. We know it seems like it, especially after the past few decades which generated in many an "inflation-complacency" that feels justified. After all, following the 2008 Financial Panic, many predicted Quantitative Easing would cause hyper-inflation.
At some point, interest rates will move higher. Advisors must understand the inherent risks, and proactively evaluate alternatives for their fixed income portfolios to manage through successfully.
With fixed income yields stubbornly low, should clients prepay their mortgage instead of investing in bonds? I argue this question is based on a false equivalence.
Powerful demographic trends will cause higher inflation and interest rates, and a reduction in inequality as labor reclaims its bargaining power in the global economy.
The pandemic has accelerated an evolution in bond trading, and it is already making a difference for investors—if bond managers have embraced tech-enabled trading.
It’s hoped that an extra $1,400 in the pockets of everyday Americans may help support lagging U.S. consumption. We believe the stimulus, along with improved vaccine roll out, may also help support commercial air travel.
Today I want to discuss an arcane-sounding but incredibly important term you need to know: Yield Curve Control. Several central banks are already using it and I see a strong possibility the Fed will join them. But first we must again consider the Gripping Hand.
With the previous week’s short-squeeze headlines behind us, investors remained optimistic about a fiscal support package, which passed the Senate by a vote of 51-50, with Vice President Harris breaking the tie.
Effective vaccines, historic fiscal stimulus, Democratic Party control of the legislature, even more stimulus, reopening economies, 6% U.S. real GDP (gross domestic product) growth, 25% U.S. EPS (earnings per share) growth, and maybe even an infrastructure plan sprinkled on top.
The 4th quarter of 2020 began with tremendous anxiety and divisiveness around the Presidential election. Investment markets reflected that anxiety.
The COVID-19 crisis opened up cracks in the muni market, but we don’t expect those cracks to alter the reality that municipal bonds can be a relatively conservative investment option. Many municipalities are under stress, but that’s not a reason to avoid munis, in our view.
Treasury yields continued to march higher in January, with the move again concentrated in longer maturities. Mortgage spreads tightened slightly, while corporate bond spreads were mostly mixed. The market remains stuck between the push/pull of the prospect for greater fiscal stimulus and ongoing vaccine rollout versus continued lockdowns and the greatest one-month mortality rate since the pandemic began nearly a year ago.
The coronavirus pushed three dozen municipal-debt issues for senior living communities into default last year and another five have already missed payments in 2021, sowing distress in one of the nation’s safest bond markets.
The U.S. Treasury held steady its planned issuance of longer-dated securities at a quarterly debt auction next week as the department awaits the result of the Biden administration’s push for a fresh coronavirus relief package.
Discerning investors could eke more gains out of developing-nation bonds, but the bulk of the rally in the riskiest corners of the market may have passed.
Cyclically oriented value stocks could make a comeback in 2021, yet there’s still a place for durable growers in a balanced equity portfolio.
We’ll touch on several bases today. We start with the latest news from the Commerce Department which just released its initial estimate of 4Q economic growth (or lack thereof). 2020 goes down as the worst economic year since the end of World War II.
Collateralized loan obligations are the largest source of demand in the loan market. Cheryl Stober breaks down some key drivers of CLO manager behavior.
Massive growth in central bank balance sheets via quantitative easing, debt monetization, and firing of “big bazooka” stimulus packages brings renewed focus to potential shocks in the business cycle. An awareness of the macroeconomic “shocks” and their impact on asset prices should be incorporated in investors’ tactical asset-allocation decisions.
In this piece, BlackRock Global Allocation Fund portfolio manager Russ Koesterich discusses the implications of a rise in stock-bonds correlations.
Nothing so animates a speculative herd as a parabolic price advance in an asset detached from any standard of value. I am convinced that future generations will use the present moment to define the concept of a reckless speculative extreme, in the same way our generation uses “1929” and “2000.”
In a year that offered a pandemic and an election as reasons for investors to bail on risky assets, 2020 turned out to be a great year for those that stayed the course. A 60/40 portfolio of diversified stocks and bonds increased by a double-digit percentage, exceeding expectations.
Does time diversification work in the real world? Do portfolios get less risky – i.e., converge to a more reliable expected return – the longer we wait?
I’m often asked if I foresee inflation or deflation. Both are possible in their own ways, and frankly I feel a little funny telling people I think we will see both. I would just like to have a growing economy and dependable money that holds its value.
There has been a lot of talk about whether the stock market is in a bubble. As usual, there are distinguished professionals on both sides of the debate, armed with convincing statistics and arguments. So, what is the average investor to do?
Declaring that the battle against Covid-19 is not over, Federal Reserve Chairman Jerome Powell pledged to keep the monetary spigots wide open to aid the pandemic-hit economy, brushing aside concerns the super-easy stance will spawn a stock market bubble and too-high inflation.
Two New Jersey Democrats are leading an effort to expand a valuable tax break for state and local levies in the next virus-relief package, a long-shot effort as lawmakers continue to squabble over the size and scope of the next round of stimulus.
Bank loans offer some of the highest yields in the current interest rate environment. We believe their unique characteristics may prevent many investors from considering them, but it may be a mistake to overlook them.
Inflation will likely heat up in the coming months, but not to worrying levels.
Over the last dozen years, investors holding the classic US 60/40 portfolio were substantially better off than their diversified peers, yet now is not the time to abandon diversification and diversifying asset classes. We believe it is imprudent to trust that escalation in valuations will continue unabated into the next decade...
For all Millennial readers, if you visited a casino in your lifetime only to see your money quickly disappear, you have not seen anything compared to trading versus professionals. So to all you Robinhood traders I say, “Welcome to the Jungle.”
Federal Reserve Chair Jerome Powell heads into what could be his last year atop the central bank determined not to repeat the mistake he made when he was a neophyte monetary policy maker seven years ago.
The 10-year Treasury note’s almost three-week run above the once-elusive 1% yield is suddenly looking precarious.
In the waning days of Donald Trump’s presidency, Jeremy Grantham warned that U.S. stocks were in an epic bubble. He now predicts Joe Biden’s economic-recovery plan will propel them to perilous new heights, followed by an inevitable crash.
Heading into 2021, advisors face numerous headwinds: a potential return of inflation, sky high equity prices, possible negative returns on bonds. Yet advisors with retail clients have few good options to protect against these risks, and many that embraced alternative mutual funds and ETFs have been disappointed with low returns, high fees and large drawdowns.
The questions advisors are asking today is:
How can retail investors gain exposure to leading hedge funds yet with the client-friendly features of an ETF? Given the difficulties for many hedge funds in the 2010s, will hedge funds will return to the Golden Age of the 2000s, when they generated alpha through two bear markets?
Calls for fiscal stimulus measures to target infrastructure are growing. But new research shows that infrastructure investments have offered few benefits to investors.
The decade-long onslaught inflicted by growth stocks on value investors is due to end, according to Gerard O’Reilly. But the data is too “noisy” for him to say when that will happen.
Municipal Bonds
Message from the Recent Bond Market Turmoil
The late-February spike in U.S. Treasury bond yields sent ripples throughout the global markets. As yields surged to the highest level in a year, stocks and commodities sold off sharply, while the dollar rallied.
Coming Out of COVID-19: A Look at Interest Rates and Inflation in Europe
There is hope that economies will see a more sustainable and robust recovery this year, given unprecedented levels of monetary and fiscal stimulus and as more individuals are vaccinated against COVID-19. But one question for investors is what happens next—will inflation and higher interest rates be a consequence?
Are Inflation Fears Justified?
In the near term, markets should not be too worried about a possible spike in demand driving up inflation and interest rates, causing asset prices to fall across the board. But longer-term inflation risks are skewed much more to the upside than many investors and policymakers seem to realize.
A Signal to Buy 30-Year Bonds
A technical indicator with a reliable history is signaling that 30-year Treasury yields will soon decline.
Government Bond Yields Have Surged, but Real Yields Are at Zero
Yields have jumped so much, in fact, that they’re giving stocks a serious run for their money. The 10-year yield is now higher than the S&P 500 dividend yield, which may have added to the selling pressure that cost stocks close to 2.5% yesterday.
The Great Jobs Reset
What normalcy will it be? I don’t expect to simply go back to the way things were. The economy as it was structured in December 2019 is gone forever. The world is different now. The economy will be different, too.
February Moving Averages: Up 2.6% from January
Valid until the market close on March 31, 2021.
The S&P 500 closed February with a monthly gain of 2.61% after a loss of 1.11% in January. At this point, after close on the last day of the month, four of five S&P 500 strategies are signaling "invested" — Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US ETF (VEU), Vanguard REIT Index ETF (VNQ), and Invesco DB Commodity Index Tracking (DBC) — unchanged from last month's quadruple "invested" signal.
Treasury Auction Results Spark Drop in U.S. Stock Prices
Despite the recent weakness in equities, Raymond James CIO Larry Adam expects positive stock growth over the next 12 months.
NewsLetter - February 2021
We hope you enjoy Harold Evensky's latest NewsLetter.
The Queen’s Gambit Declined
The Queen’s Gambit miniseries helped propel Netflix to a winning earnings report last quarter, but in fact the chess strategy it is named after has helped propel chess players to winning games for decades.
High-Yield and Bank Loan Outlook - First Quarter 2021
Our positive 2021 economic outlook, combined with better-than-expected company fundamentals, supports strong credit performance and spreads.
CB Leading Economic Index: LEI and CEI Up in January
The latest Conference Board Leading Economic Index (LEI) for January was up 0.5% from the December final figure of 109.7.
Retirement Planning in the Post-4% World
Today’s low bond yields and high equity valuations have led many to jettison the traditional 4% initial safe-withdrawal rate assumption. But I will show that the optimal “safe” withdrawal rate depends considerably on the retiree.
What the Pandemic Taught Us About Target Date Funds
Target date funds should be designed to reduce the risk of rash selling.
Powell Goes Easy on Surging Yields While Central Bank Peers Fret
The unprecedented $9 trillion rescue mission by central banks to haul the world economy from its coronavirus recession is being tested as rising bond yields and inflation bets threaten their ability to keep borrowing costs down.
GMO 7-Year Asset Class Forecast: January 2021
The GMO Asset Allocation Team has released its latest 7-Year Asset Class Forecasts through January 2021.
The Polar Vortex and Texas’ Municipal Power Market
About a week ago, an unprecedented polar vortex descended upon the southwestern United States. The deep cold forced power plants in Texas to take production offline, leading to rolling blackouts and leaving more than four million households without power.
The Runway Toward Higher Treasury Yields Looks Free and Clear
The obstacles to higher yields in the world’s biggest debt market are slowly melting away.
Robert Shiller: U.S. Equities are Still the Place to Invest
U.S. stocks have the highest CAPE ratio of any global equity market, but they are still the place to invest. But the inventor of that metric, Robert Shiller, says that stocks are indeed risky.
Municipal Bond Outlook: Recovering at Different Speeds
Political change, continued fiscal support will drive municipal markets in 2021, although outcomes are likely to vary.
Muni Credit Plays Defense When Rates Rise
As COVID-19 vaccines roll out and resrictions lift, a US economic rebound could lead to tighter Federal Reserve policy and higher yields. Municipal bond investors may worry about how rising yields could hurt their portfolios.
Spectate or Speculate
Many investors think there are only two options in a market where participants have become overly exuberant, either 'I want in' or 'Get me out.' Our strategies are more nuanced, and we believe fit better with what we expect to transpire.
Random Thoughts from the Frontline
Rather than going deep into one theme, this week we will do a “Random Thoughts” from the Frontline. Today we will cover several topics in shorter form: valuations, infrastructure, the debacle in Texas, and a lot more.
How COVID-19 Vaccines and Brexit Create the Trade of the 2020s
In late 2020, a new kid emerged on the bargain-of-the-decade block. UK stocks, and notably UK value, reached very cheap levels relative to value stocks in other developed economies. Today, UK value remains at remarkably low valuations relative to most of its fundamentals.
COVID 19 Disrupts Municipalities—Will Taxing Millionaires Accelerate Outmigration?
Apart from some high-profile downgrades, the muni credit markets finished 2020 buoyed by breakthrough vaccines and signs that state and local tax collections were better than anticipated.
Fixed Income: Low Yields Don’t Tell the Whole Story
It’s tempting these days for some investors to question the role of fixed income in portfolios. After all, real yields have plunged, potentially leading to less income today and smaller capital gains tomorrow.
15 Explanations for the Bubble in Stock Prices
I offer 15 explanations for the bubble in stock prices and a single explanation for the one in bond prices. Those bubbles could deflate for any of 10 reasons I also identify, severely diminishing the retirement savings of baby boomers.
Why Printing Money May Not Create Inflation
Is inflation coming? At some point, yes. We know what generates inflation, and we will be watching for it. Until then, we do not expect a wildfire in inflation land.
Monthly Municipal Market Update, January 2021
A brief monthly update on what's happening in the municipal bond market.
Surging U.S. Yields Show Stimulus Impact Still Getting Priced In
U.S. Treasury yields rose to the highest since February 2020 and are at risk of climbing further, as investors start to factor in the full economic impact of a stimulus plan totaling as much as $1.9 trillion.
Simon Says
The object of the game was to get to the finish line first and then become the leader the next round. The stock market has its own game of “Simon says” and that is in the mall property world.
The Green Transition: Implications of the European Recovery Plan
Despite questions over financing the European Union’s (EU’s) new Green Deal, the green transition is now under way.
There is An Alternative to Crazy Expensive Tech Stocks, We Just Need to Remove the Kaleidoscope Glasses
To say the market is bubblelicious is a bit of an understatement given that retail “investment” in call options and penny stocks is quite literally off the charts, dwarfing numbers we saw in 1998-2000.
Taper Tantrum to VAR Shock: When the Next Bond Rout Is Coming
Cast a gaze across global bond markets and it’s a sea of calm. Yields are close to record lows, volatility is nowhere to be seen and central banks are still ploughing trillions of dollars into the economy to help foster a recovery.
The Liquidity Surge that Will Drive Negative Rates
Short-term interest rates are approaching zero percent and will likely be negative shortly. The culprit is an unusual circumstance at the U.S. Treasury.
Beware the Fourth Wave of COVID-19
It isn't over and financial markets don't accept that yet. I realize suggesting anything negative about the virus is misanthropic, but the truth matters and the optics are misleading.
The Case for Emerging Markets
With U.S. equity valuations very rich by historical standards, many – including Jeremy Grantham, Rob Arnott and Vanguard – are predicting emerging markets to excel. I’ll examine the case and give my thoughts on how to invest in emerging markets.
An Out-of-Sample Test for Factor-Based Strategies
Factor-based models are often criticized for data mining. One way to address that charge is with “out-of-sample” testing over longer time frames. But that takes time. New research provides an alternative out-of-sample test – using emerging-market bonds.
Overstimulation Risk
If, however, the pandemic continues into summer, it will mean the Gripping Hand is still squeezing us. Employment won’t recover and more small businesses will fail. This relief package, as large as it is, may prove necessary and maybe even too small.
Reports of Value's Death May Be Greatly Exaggerated
Rob Arnott: “There hasn’t been a better time to be a value investor at any other time in my career. I look back at the tech bubble and I never thought I would see valuations stretched the way they were then. We're back to that, and then some." We invite you to revisit “Reports of Value’s Death Have Been Greatly Exaggerated” now published in the Financial Analysts Journal.
Schwab Market Perspective: Disconnection
Hope is high that economic growth will accelerate as more people are vaccinated against COVID-19, but so far economic data has been lackluster. Meanwhile, bond investors are expecting inflation despite signs that the economic recovery’s momentum may be stalling. Why does everything seem so disconnected?
Risk Within Reason
Recent volatility and high valuations underscore the need to be selective, but risk premiums still justify a moderately pro-risk stance, in our view.
Stocks Are Outperforming Bonds by the Widest Margin Since 2013
Investors awash in optimism have bid up equities to their best start of the year relative to bonds in almost a decade.
Two-Year Treasury Yields Briefly Breach 0.1%, Marking Record Low
Yields on two-year Treasury yields briefly printed a record low under 0.1% on Thursday as cash trading got underway in London after a holiday in Asia.
Active Semi-Transparent ETFs: What’s Under the Hood?
This is a new type of exchange-traded ETF that is built differently from a traditional ETF.
Will High-Dividend Payers Make a Comeback in 2021?
Having strongly underperformed the wider stock market in 2020, high-dividend stocks have shown early signs of a rebound in recent weeks.
Investment Strategies for a Booster-Shot Recovery
Our Fixed Income CIO Sonal Desai shares her investment views and strategies for the post-pandemic recovery. She explains why inflation looks likely to gain steam, and how the balance of fundamentals and valuations become especially crucial today when looking for attractive returns in fixed income.
The Fed’s Blindspot
I don’t say this often, but Fed Chairman Jerome Powell is wrong. Regular readers of our investor letters and other publications will recall that we regularly cite Chairman Powell as doing the best he can with the levers he has while arguing correctly for others to do their part.
Loans or Bonds?
Relative value currently favors floating-rate loans over high-yield bonds.
What’s the Value of a Dollar?
Rick Rieder and team think that today’s potent policy cocktail holds important implications for the path of economic growth, markets and the value of a dollar.
Vexing Today’s Convex Pricing Behavior
Fortunately, human behavior has a history of repeating itself at extremes. The worst buying decisions are made at the top. Just like bonds, the convexity is true when yields rise going forward. It’s a slippery slope and could be vexing.
Great Reflation Trade Brings New Threats to the Stock Rally
For the first time in a long time, there’s a conversation on Wall Street about when equities might start to feel the heat from reflation signals in the bond market.
Dire Bond Returns Have 60/40 Managers Juicing Portfolios With FX
It was a dinner conversation with former Federal Reserve Chairman Ben Bernanke in early 2020 that convinced Cesar Perez Ruiz that the golden age of bond investing was over.
The Return of Inflation
Inflation is not dead. It is not gone. It has not been tamed. We know it seems like it, especially after the past few decades which generated in many an "inflation-complacency" that feels justified. After all, following the 2008 Financial Panic, many predicted Quantitative Easing would cause hyper-inflation.
Rising Interest Rates Can Wreak Havoc on Fixed Income Portfolios
At some point, interest rates will move higher. Advisors must understand the inherent risks, and proactively evaluate alternatives for their fixed income portfolios to manage through successfully.
A Mortgage is Not a “Negative Bond”
With fixed income yields stubbornly low, should clients prepay their mortgage instead of investing in bonds? I argue this question is based on a false equivalence.
Will Demographic Trends Drive Higher Inflation and Interest Rates?
Powerful demographic trends will cause higher inflation and interest rates, and a reduction in inequality as labor reclaims its bargaining power in the global economy.
The Future of Bond Trading—and Why It Matters
The pandemic has accelerated an evolution in bond trading, and it is already making a difference for investors—if bond managers have embraced tech-enabled trading.
Could $1,400 Stimulus Checks Lift Air Travel Demand?
It’s hoped that an extra $1,400 in the pockets of everyday Americans may help support lagging U.S. consumption. We believe the stimulus, along with improved vaccine roll out, may also help support commercial air travel.
Controlling the Curve
Today I want to discuss an arcane-sounding but incredibly important term you need to know: Yield Curve Control. Several central banks are already using it and I see a strong possibility the Fed will join them. But first we must again consider the Gripping Hand.
Weekly Market Snapshot
With the previous week’s short-squeeze headlines behind us, investors remained optimistic about a fiscal support package, which passed the Senate by a vote of 51-50, with Vice President Harris breaking the tie.
Why U.S. Rates Are Only Likely To Rise Modestly In 2021
Effective vaccines, historic fiscal stimulus, Democratic Party control of the legislature, even more stimulus, reopening economies, 6% U.S. real GDP (gross domestic product) growth, 25% U.S. EPS (earnings per share) growth, and maybe even an infrastructure plan sprinkled on top.
Quarterly Letter
The 4th quarter of 2020 began with tremendous anxiety and divisiveness around the Presidential election. Investment markets reflected that anxiety.
Why Widespread Muni Defaults Are Unlikely to Happen
The COVID-19 crisis opened up cracks in the muni market, but we don’t expect those cracks to alter the reality that municipal bonds can be a relatively conservative investment option. Many municipalities are under stress, but that’s not a reason to avoid munis, in our view.
Total Return Perspectives: January 2021
Treasury yields continued to march higher in January, with the move again concentrated in longer maturities. Mortgage spreads tightened slightly, while corporate bond spreads were mostly mixed. The market remains stuck between the push/pull of the prospect for greater fiscal stimulus and ongoing vaccine rollout versus continued lockdowns and the greatest one-month mortality rate since the pandemic began nearly a year ago.
New Year Brings No Respite to Muni Senior Living Sector Turmoil
The coronavirus pushed three dozen municipal-debt issues for senior living communities into default last year and another five have already missed payments in 2021, sowing distress in one of the nation’s safest bond markets.
U.S. Plans Record Debt Sale; No Big Changes Before New Stimulus
The U.S. Treasury held steady its planned issuance of longer-dated securities at a quarterly debt auction next week as the department awaits the result of the Biden administration’s push for a fresh coronavirus relief package.
Bond Traders Struggle to Pick Winners in Riskiest Markets
Discerning investors could eke more gains out of developing-nation bonds, but the bulk of the rally in the riskiest corners of the market may have passed.
Using a Barbell to Strengthen Your Equity Portfolio
Cyclically oriented value stocks could make a comeback in 2021, yet there’s still a place for durable growers in a balanced equity portfolio.
Overview: 2020 Economy Worst in 74 Years
We’ll touch on several bases today. We start with the latest news from the Commerce Department which just released its initial estimate of 4Q economic growth (or lack thereof). 2020 goes down as the worst economic year since the end of World War II.
Demystifying CLO Demand for Leveraged Loans
Collateralized loan obligations are the largest source of demand in the loan market. Cheryl Stober breaks down some key drivers of CLO manager behavior.
Beware the Shocks in the Road
Massive growth in central bank balance sheets via quantitative easing, debt monetization, and firing of “big bazooka” stimulus packages brings renewed focus to potential shocks in the business cycle. An awareness of the macroeconomic “shocks” and their impact on asset prices should be incorporated in investors’ tactical asset-allocation decisions.
The Case for More Cash, Fewer Treasury Bonds
In this piece, BlackRock Global Allocation Fund portfolio manager Russ Koesterich discusses the implications of a rise in stock-bonds correlations.
Detached Parabolas and Open Trap Doors
Nothing so animates a speculative herd as a parabolic price advance in an asset detached from any standard of value. I am convinced that future generations will use the present moment to define the concept of a reckless speculative extreme, in the same way our generation uses “1929” and “2000.”
First Quarter 2021 Economic & Market Outlook: Looking Beyond the Traditional
In a year that offered a pandemic and an election as reasons for investors to bail on risky assets, 2020 turned out to be a great year for those that stayed the course. A 60/40 portfolio of diversified stocks and bonds increased by a double-digit percentage, exceeding expectations.
Does Time Diversification Work?
Does time diversification work in the real world? Do portfolios get less risky – i.e., converge to a more reliable expected return – the longer we wait?
Inflation and Broken Windows
I’m often asked if I foresee inflation or deflation. Both are possible in their own ways, and frankly I feel a little funny telling people I think we will see both. I would just like to have a growing economy and dependable money that holds its value.
Is the Stock Market in a Bubble?
There has been a lot of talk about whether the stock market is in a bubble. As usual, there are distinguished professionals on both sides of the debate, armed with convincing statistics and arguments. So, what is the average investor to do?
Fed’s Powell More Worried by Cool Economy Than Hot Markets
Declaring that the battle against Covid-19 is not over, Federal Reserve Chairman Jerome Powell pledged to keep the monetary spigots wide open to aid the pandemic-hit economy, brushing aside concerns the super-easy stance will spawn a stock market bubble and too-high inflation.
Democrats Aim for SALT Write-Off Expansion in Stimulus Bill
Two New Jersey Democrats are leading an effort to expand a valuable tax break for state and local levies in the next virus-relief package, a long-shot effort as lawmakers continue to squabble over the size and scope of the next round of stimulus.
Considering Bank Loans? Three Key Considerations
Bank loans offer some of the highest yields in the current interest rate environment. We believe their unique characteristics may prevent many investors from considering them, but it may be a mistake to overlook them.
Some Worries May Be Inflated
Inflation will likely heat up in the coming months, but not to worrying levels.
Is Diversification Dead?
Over the last dozen years, investors holding the classic US 60/40 portfolio were substantially better off than their diversified peers, yet now is not the time to abandon diversification and diversifying asset classes. We believe it is imprudent to trust that escalation in valuations will continue unabated into the next decade...
Welcome to the Jungle
For all Millennial readers, if you visited a casino in your lifetime only to see your money quickly disappear, you have not seen anything compared to trading versus professionals. So to all you Robinhood traders I say, “Welcome to the Jungle.”
Powell, With Year to Run at Fed, Aims to Avoid Past QE Mistake
Federal Reserve Chair Jerome Powell heads into what could be his last year atop the central bank determined not to repeat the mistake he made when he was a neophyte monetary policy maker seven years ago.
Treasury Market’s Grip on 1% Yields at Risk of Slipping Away
The 10-year Treasury note’s almost three-week run above the once-elusive 1% yield is suddenly looking precarious.
Grantham Warns of Biden Stimulus Further Inflating Epic Bubble
In the waning days of Donald Trump’s presidency, Jeremy Grantham warned that U.S. stocks were in an epic bubble. He now predicts Joe Biden’s economic-recovery plan will propel them to perilous new heights, followed by an inevitable crash.
Hedge Funds Are Back – Can Allocators Get Hedge Fund Alpha in an ETF?
Heading into 2021, advisors face numerous headwinds: a potential return of inflation, sky high equity prices, possible negative returns on bonds. Yet advisors with retail clients have few good options to protect against these risks, and many that embraced alternative mutual funds and ETFs have been disappointed with low returns, high fees and large drawdowns.
The questions advisors are asking today is:
How can retail investors gain exposure to leading hedge funds yet with the client-friendly features of an ETF? Given the difficulties for many hedge funds in the 2010s, will hedge funds will return to the Golden Age of the 2000s, when they generated alpha through two bear markets?
The Lackluster Record for Infrastructure Investments
Calls for fiscal stimulus measures to target infrastructure are growing. But new research shows that infrastructure investments have offered few benefits to investors.
Gerard O’Reilly on the Future of Value Investing
The decade-long onslaught inflicted by growth stocks on value investors is due to end, according to Gerard O’Reilly. But the data is too “noisy” for him to say when that will happen.