Why are high -
yield bonds so popular today?
Not exact matches
So, when an economist or
bond fund manager makes an accurate forecast about Treasury
yields, his or her clients are probably doing very well.
So, it is a very different market than it was 10 years ago, and you're going to see a lot of corporate
bond issuance as these infrastructure projects go out there, and you can capture some pretty good
yields and you know what you're buying because it's a corporate
bond.
The
bonds of iHeartMedia have long been in the basket of «distressed debt,» meaning their prices have fallen
so far to where their
yields are at least 10 percentage points higher than equivalent Treasury
yields.
So far, though, no one is reporting any unusual outflows in the
bond market, but Hamilton - Keen cautions investors against chasing high -
yield products.
Essentially, we've spent 35 years watching
yields decline,
so investing in long - term
bonds has proved quite profitable.
The central bank said it will purchase Japanese government
bonds so that the
yield on the 10 - year note will remain at around zero percent.
Normally, Canadian
bond yields roughly trace U.S.
bond yields,
so you'd think an interest rate spike south of the border would provoke one here, which could hurt indebted Canadians and the housing market.
But he warned that could be changing: «There's a very low hurdle for that surprise because
bond market
yields are
so low in the front end of the curve.
NEW YORK, Nov 28 - The Federal Reserve faces the challenge of standing by as financial markets «correct» as the central bank trims its asset holdings, U.S. hedge fund manager David Tepper said on Tuesday, adding he was surprised the
bond -
yield curve was
so flat.
With
bond yields so low, it doesn't cost companies much to borrow money to repurchase equity.
Contributing to the stock market's agita
so far this year has been the prospect that the 10 - year US Treasury
Bond Yield may be on the verge of rising above 3.00 %, a level...
During times of recession the economy is stimulated with low interest rates and once they get low enough, the
yield on
bonds and other fixed investments becomes
so unattractive that money starts to flow into equities.
So far, 2018 has not been an easy year for high -
yield bond ETFs.
So while there could be one or even five year periods where longer maturity
bonds perform fairly well from these
yield levels, over the long - term they're likely to be a poor investment in terms of earning a decent return over the rate of inflation.
To receive the full benefit of a
bond ladder, one needs not only to stay the course for a number of years (
so that lower
yield and higher
yield purchases benefit from cost averaging), but also with a relatively stable amount of capital.
But keep in mind: More interest rate sensitive
bonds generally have higher
yields,
so moving to a shorter duration investment could result in less income.
The marginal benefit of
bonds vs. cash is
so small, at current
yields, that one can argue it just isn't worth it.
However, despite Italy's budget difficulties, Monti said that it would not need a bailout, although the country may want Europe's rescue funds and the ECB to buy its
bonds so that
yields come down to a more manageable level.
So, will a 3 percent
bond yield really doomed the stock market?
Bloomberg reported Thursday that after Draghi's bold words about protecting the euro last week, markets expect him to deliver some sort of drastic action to do
so and to relieve pressure on
bond yields, which have climbed steadily higher for Spain and Italy.
Yields have an inverse relationship to
bond prices and fall when investors flock to a
so - called safe haven asset.
So why would an investor choose to hold
bonds if this type of market is a possibility from current
yields?
High -
yield bonds are in the eighth year of an investment cycle that has seen assets under management grow threefold, to $ 300 billion,
so interest among investors remains high.
Finally, the Fed's easy - money policies have pushed investors into the stock market because
bond yields are
so low.
Real
bond returns have been high over the past 30 years or
so because nominal starting
yields were high and inflation has fallen.
So while these «fallen angel»
bonds have the potential to be intrinsically higher quality than debt originally issued at the junk or high -
yield level, undue structural selling pressure from the downgrade can cause them to sell at a discount.
Typically, a higher - rate environment will increase spreads for banks / insurers, but you're absolutely right that the 10 - year
yield could stay flat, especially when the
yields for government
bonds of other countries are
so low.
A rise of 1 - 2 % isn't going to do much, and I don't think we'll rise by more than 1 - 2 % on the 10 - year
bond yield anyway,
so nobody needs to panic.
So on the next screen, the tool suggests a
bond for each rung of the ladder and shows a summary of the ladder, including the expected
yield and annual interest payments.
Credit Risk: Investors that are chasing
yield in lower qualiity
bonds are doing
so by increasing their credit or default risk.
The first thing they watch when doing
so is how high or low interest rates on treasury
bonds with different maturities are, which is also referred to as the
yield curve.
As the fed funds rate goes up,
so, too, will the
yields on short - term
bonds funds.
But just like we had relatively little history of large - cap stocks that weren't large businesses, we have relatively little history of
bond yields being
so close to zero.
Germany is highly leveraged to the Chinese industrial cycle
so this may be a sign that Chinese growth has slowed more than the authorities admit — as indicated by plummeting
yields on Chinese
bonds, and rates on three - month Shibor and certificates of deposit.
If nominal GDP growth is going to be «lower for longer» then
so will
bond yields.
The main exception to this global pattern has been Japan, where 10 - year
bond yields have remained remarkably stable, generally trading in the range between 1.7 per cent and 1.8 per cent
so far this year (Graph 8).
You're right that the margin of safety is
so much smaller in
bonds because the
yield won't be there to pick up the slack.
Because the level is
so critical and the base is
so big, a break in the long -
bond yield above 3.22 % likely would lead to a big move up in
yields.
Their cost of capital is a function partly of low interest rates and part of the implicit share price is a function of the fact that investors have looked at equities for dividends rather than
bonds for
yield because the
bond market is
so expensive.
That's what to watch for now - things like the difference between commercial paper
yields and Treasury bills, the difference between Moody's BAA and AAA
yields, the difference between the Dow Jones Corporate
Bond Index
yield and 10 - year Treasury
yields, and
so forth.
The net rise in Australian long
bond yields over recent months has been less than in corresponding US
yields,
so the spread between Australian and US
yields has narrowed.
While much of the outflows
so far have been a result of investors switching out of high
yield into safer money - market and government
bond funds, Gutteridge believes we have seen the bulk of the selling.
High
yield bonds have only been around since the 1980s,
so they've never really experienced a sustained rising rate environment.
Yet by setting
yields so low and
bond prices
so high, markets are sending a clear signal that they want more, not less, government debt.
Although decades of history have conclusively proved it is more profitable to be an owner of corporate America (viz., stocks), rather than a lender to it (viz.,
bonds), there are times when equities are unattractive compared to other asset classes (think late - 1999 when stock prices had risen
so high the earnings
yields were almost non-existent) or they do not fit with the particular goals or needs of the portfolio owner.
So bond yields are set by supply and demand from the whole market.
So assuming earnings growth is not affected, slower inflation and lower
bond yields might support higher P / E levels.
Putting aside the performance of
bonds during the bear market beginning in 1980 (both because the starting
yields on Treasuries were
so high but also because the bear market was relatively mild as the decline began from relatively low levels of valuation), what's interesting about the above chart is how dependably
bonds protected a portfolio during equity bear markets.
With
yields having been
so low for
so long,
bonds are suddenly providing some competition with equities at these higher
yields levels.