Tag Archives: Bonds

The wide spread between the 2-year note and the 10-year note is around 10 basis points which is the flattest since 2007

The stock marked plummeted on Tuesday with Nasdaq down near 4 percent. This is scary for many investors around the world. More scary is a quick look at the 2-year note that dropped more than 26 percent.

The wide spread between the 2-year note and the 10-year note is around 10 basis points which is the flattest since 2007. Bond prices move in the opposite direction of yields, and the spread between the 3-year note and the 5-year note have already inverted. 1-year note and 10-year isn`t near at all.

In a normal situation, the short-term bills yields less than the long-term bills, which means that investors expect a lower return when their money is tied up for a shorter period like 1,2 or 3-year notes. Investors require a higher yield to give them more return on a long-term investment.

If investors have little confidence in the near-term economy, the yield curve inverts. Investors demand more yield for a short-term investment than for a long-term one. They belive the near-term as riskier than the long-term.

In a situation like that, investors would prefer to buy long-term bonds and tie up their money for years in the long run even though they receive lower yields. The reason why investors do that is because they believe the economy is getting worse in the near-term.

An inverted yield curve is most worrying when it occurs with Treasury yields and that`s when yields on short-term Treasury bills, notes and bonds are higher than long-term yields. During healthy economic growth, the yield on a 30-year bond will be three pints higher than the yield on a three-month bill.

The reason why the short-term bill decline and makes an inverted yield curve is that investors believe they will make more by holding onto a longer-term bill than a short one. They think they need to reinvest in a short-term bill a few months any way.

If investors think that the economy is slowing and the recession is coming, they expect the value of the short-term bills to plunge in a short period of time. When the economy slows down, the FED lowers the Fed funds rate, and the short-term Treasury bill yields track the fed funds rate.

It is when the demand for long-term bills goes up that the demand for the short-terms bills goes down. Then the yield for short-terms bills goes up while the yield for the long-term bills goes down, and that`s whats happening now.

For example,when the yield on short-term Treasury’s rises higher than the yield on long-term bonds is where the yield curve inverts. The Treasury yield curve inverted for the first time since the recession. The 3-year note was higher than the 5-year note. Investors are saying that the economy is better in five years than in three years.

President Trump is disappointed when it comes to the FED`s descision to raise the rates which is going to raise to about 3,5 percent in 2020. Mr Trump and investors are worried it could trigger an economic slowdown in three years if the rates is too high.

This small inversion is probably temporary, but if it continues to grow bigger, we can be thrown into a recession. The current fed funds rate determines the outlook of the U.S economy, and people should never ignore an inverted yield curve. Just take a look at the history.

In June 2007, the yield curve was on the brink and went back and forth, between inverted and flat yield curve. The Fed reacted too late and lowered the fed funds rate ten times until it reached zero by the end of 2008.

The yield curve was no longer inverted but it was too late, and we know the rest of the story; The economy went into the worst recession since the Great Depression. This is just a reminder.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

Leave a comment

Filed under Stock market

High-yield bonds vs the stock market

High-yield bonds became very popular in the 1980`s and is better known as junk bonds, and that is an interesting investment which is widely used for corporate takeovers. It became popular because high-yield bonds outperformed traditional bonds on average.

30 years earlier (1950`s), high-yield bonds were fallen angels. Companies that had issued bonds when they were healthy was falling on hard times, and high-yield investors were buying bonds in turnarounds.

High-yield bonds were financed unproven businesses in the 1980`s, and was issued for speculation, and now those bonds are issued by highly leveraged companies. High-yield bonds on the market today is with a high degree of variety, and they trend with the stock market, but can act like bonds other times.

To show this, I have printed out iShares iBoxx $ High Yield Corporate Bond (HYG) with SPDR S&P 500 (SPY).

Chart

The Yield line is inverted. If yields on corporate bonds rise, then stock prices will fall, and in times when money leaves corporate bonds, it can flight to safety, which sometimes could be Treasuries. That money would also leave stocks. That means stocks can go up in periods of flat or rising yields. The key to this anomaly is risk.

This has happened before. During periods of rising risk appetite among investors. We saw it in 1998, the dot-com boom and during the subprime boom. Two of them were the building of bubbles, but all of them correlated with times when the investors hunger for risk rose.

It happens because money leaves bonds during periods of risk appetite and goes into stocks, which means stocks don`t fall when corporate bonds yields rise. The stock market is booming because investors aren`t afraid to take reasonable risks. The money flows into stocks, not Treasuries. Yields are 50% greater compared to 10-year Treasuries.

HYG is not acting like stocks but it`s not acting like a bond investment either. SPY is moving higher while HYG is declining. It was a correlation before 2011, but after that it all changed. The above should be on every investors mind. Many investors said the rally in junk-rated bonds is in a bubble or close to one, and HYG ETF and the SPX should be in the forefront of Equity Traders minds.

Some say that high-yield isn`t an good opportunity anymore. Watch out for this chart and look out for RS of HYG to SPY for signals of a market top. Look out for HYG outperformance. Weakness in equities is often preceded by a loss of momentum in credit markets. HYG need to stabilize. If not, equities will tumble. The disconnect between stocks and bonds probably means more pain ahead. Will the junk bond bubble burst, or stocks tumble? I`m exited about the end of the trading year. China cut the rate today, and the U.S markets are all up.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

Leave a comment

Filed under Stocks

Risk and reward

The U.S market fell yesterday and it was all red. Today the Asian market i up. Nikkei is up from a two week low. Gold is trading at $1334,50. Netflix is down -15% from it`s all time high. Are you willing to buy stocks in Netflix now? Or blue chips? What about risky small-cap stocks? Bonds?

Investing carries a certain amount of risk, but how much risk are you willing to take? What are you willing to pay for a stock? How much can you afford to lose? You have to look for risk and reward.

When you invest, you can get some pain, but you can also get some gain. That`s why you have to weigh the reward against the risk when you are investing. Understanding risk and reward is the key in investing in stocks and other financial papers.

You have all heard the words: “the higher the risk, the higher the potential return”. It`s very important to understand you own comfort level when you are investing. Then you will clearly understand the relationship between risk and reward.

Bank certificates of deposit (CDs) with a fedrally insured bank are also very secure. But the price for this safety is a very very low return on you investment. You can end up earning nothing when you calculate taxes on your gain and inflation.

To invest you need to think about the amount you are willing to put into the market. Before you invest, you must decide when you are willing to sell. How much rate of return or growth do you accept? And don`t forget fees, inflation and tax and the value of the dollar.

All those thing goes in different directions. That`s why many investors like to put different eggs in different baskets. Investors are diversifying their portfolios, and invest in different papers with various degree of risk. The goal is to take profit from a rising market, and to protect themself against dramatic losses in a down market.

New today: Unemployment Claims at 8:30am, Flash Manufacturing PMI at 9:00am, New Home Sales at 10:00am.

risky.behavior

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

Leave a comment

Filed under Stock market, Stocks