Posts Tagged ‘Treasuries’
Tuesday, March 26th, 2013
by Sober Look
With all the talk of the so-called Great Rotation, evidence points to investors still pumping billions into fixed income. And in spite of a fairly broad conviction that rates will be rising in the near future, investment portfolios are loaded with treasuries. Demand for US government paper continues to be strong in spite of the worst risk/return profile in decades (see post) and implied real yields deep in the negative territory (see post).
The obvious explanation is the public sector purchases by the Fed as well as other nations with significant dollar reserves. Traders continue to call the 10-year treasury the “widow-maker”, given how painful it has been to short that paper. Nobody wants to get in front of the freight train in the chart below.
Securities held outright by the US Federal Reserve (source: FRB)
But there is another reason. As investors move into equities while market indices hit new records, investors need an effective hedge. And over the past few years, long-dated treasuries have delivered precisely that. As discussed in this post, the right mix of treasuries with equities dramatically reduced the daily volatility of the portfolio. That quality of longer dated treasuries persists through today. The anti-correlation between the Barclays Long U.S. Treasury Index and the S&P500 index remains quite strong (-0.7).
Daily returns, 90 day rolling window
What’s particularly interesting about long-dated treasuries as a hedge is that the anti-correlation increases during periods of stress in the financial markets. In fact the hedge effectiveness was the strongest during the Italy fears flareup in the fall of 2011, followed by another dip last summer when Spain was in the crosshairs (keep in mind the chart above shows correlation over the previous 90 days). Very few hedging instruments have the “optionality” that kicks in at the time when one really needs it. Equity options and credit instruments (such as CDX) were not nearly as effective, particularly given the cost of decay/negative carry.
Investors are therefore willing to pay the premium of negative real rates and limited upside of treasuries in order to minimize portfolio volatility. It’s unclear if this relationship will hold or ultimately revert to historical levels. For now however, as Europe continues to spook investors who are piling into equities, treasuries remain in demand as an effective hedge.
Copyright © SoberLook.com
Monday, February 11th, 2013
The Economy and Bond Market Radar (February 11, 2013)
Treasury bond yields declined modestly this week as economic news was sparse and what was released was more or less in line with expectations. There was a reactionary flight to safety into Treasuries early in the week as political rumblings in Spain and Italy caused a knee-jerk reaction. Later in the week European Central Bank (ECB) president Mario Draghi commented on the importance of exchange rates to price and growth stability. The market took that as a sign the ECB is concerned about the strength of the euro, which recently hit the highest levels in six months.
- The January ISM nonmanufacturing index was little changed from last month but remained at a high level and indicates continued economic improvement.
- January retail sales appeared to be better than expected as same-store sales rose 4.5 percent. The U.S. Census Bureau will release official January results next week.
- Chinese economic data for January was generally better than expected with strength seen in exports and money supply.
- Factory orders in December rose 1.8 percent but were well below the 2.8 percent expected.
- Fourth quarter productivity fell 2 percent as unit labor costs rose 4.5 percent and hours worked rose 2.2 percent.
- Political volatility surfaced again in Europe this week and reminds us of the still relatively fragile nature of the recovery.
- The debt ceiling debate appears to be pushed into May, allowing the market to focus on economic fundamentals.
- While some Federal Reserve members expressed concerns over continued quantitative easing, the Fed still remains committed to an extremely accommodative policy until the economy improves.
- Globally central banks are increasing their stimulative policies, as Japan’s recently elected prime minister vowed to take on deflation and deflate the Yen.
- The economy appears to gaining momentum and bonds have sold off, the risk for bondholders is that this trend continues.
Tuesday, August 7th, 2012
August 6, 2012
The Wall Street Journal published an article on August 1 headlined: “Bill Gross: Equities are Dead.” In fairness to Gross, what he actually wrote in his August “Investment Outlook” was, “the cult of equities is dying.” We agree with most of Gross’s argument—but not with his unsupported forecast of extremely low stock returns.
Let’s take a look at Gross’s claims:
1) Gross notes that bonds have outperformed stocks for the last 10, 20 and 30 years. With long US Treasuries currently yielding 2.7%, it is unlikely that bonds will replicate the performance of decades past.
We agree. That is why stocks are attractive today relative to bonds. Bonds—having outperformed—are now unusually expensive and have low expected returns going forward. By contrast, stocks—having performed poorly—are cheaper than normal and are likely to significantly outperform bonds over the next 10 years.
2) Gross argues that US stocks can’t maintain their 6.6% average annualized real return over the last 100 years. The 6.6% real equity return was 3% higher than real GDP growth, with shareholders gaining at the expense of labor and government. Labor and government must demand some recompense for wealth creation, and GDP growth itself must slow due to deleveraging.
We agree. We are now in a lower return environment. The question is, how low? Let’s concede that stocks will grow in line with real GDP. Over the long haul, real GDP growth primarily reflects population (growing a little over 1%) and productivity (growing just above 2%). That would give us a projected real equity return of maybe 3%—less than half the historical 6.6% rate.
3) Gross asserts that stocks will have a nominal return of 4%.
This is where Gross’s math gets fuzzy. Why this sudden switch to nominal instead of real returns? Does Gross expect that US population will shrink, productivity gains will disappear, and inflation will remain quiescent forever? That is what needs to happen for long-term nominal GDP growth to be as low as 4%. The scenario is possible, but hardly likely. Just assuming that inflation runs at a relatively tame 3% with below-normal real GDP growth of another 3%, we’d have nominal equity returns of 6% or so. That looks quite attractive when you get just 2.7% for holding long bonds to maturity.
In our recently published paper “The Case for the 20,000 Dow,” we show that with reasonable assumptions we can get returns in the 6% to 7% range and that the Dow hits that target in five to 10 years. We will also lay out our argument in an upcoming blog post.
Most investors today are very concerned about equity volatility, and for good reason. But there is another risk that should concern investors: the risk that their investments will not keep up with inflation and meet their goals. As investors balance short-term market risk against the long-run risk of falling short of their objectives, we think an appropriate allocation to equities continues to improve the likelihood for success.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer of Asset Allocation and Defined Contribution Investments at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.
Tags: Alliancebernstein, August 1, Bill Gross, Bonds, Equity Return, Fairness, GDP, GDP Growth, Government Labor, inflation, Investment Outlook, Productivity Gains, Real Gdp, Recompense, Seth, Stock Returns, Treasuries, Wall Street Journal, Wealth Creation
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Sunday, August 5th, 2012
The TLT ETF is one of the most watched in the market, since it’s the easiest way for institutions to quickly move in and out of U.S. Treasury bond exposure. For many months during these rallies the fly in the ointment has been the U.S. dollar and Treasuries which constantly had a bid. The TLT had not been below its 50 day moving average since early April which is just about the time the equity markets began weakening materially. This instrument is now sitting on it for the second time in just over a week so it is at an important juncture.
As for the market as a whole you just have to tip your hat – I went back to review and 4 of the past 6 Fridays have seen monster moves up negating most/all of the moves down earlier in those weeks. The Friday after the Euro summit, last Friday after Draghi’s comments, this Friday, and one other Friday that I don’t recall the reason for the big move. Strangely each of the past 9 Mondays has seen markets close in the red.
However each time the market has been on a cusp like this of a breakout, the next few sessions have led to serious selloffs. We’ll see if this time around it is for real. This market is very similar to last summer/fall’s market in that the moves are violent and gaps are constant, but that market had a sideways to down bias whereas this one somehow has been going up with most of the gaps being to the upside instead of balanced between up and down (since June). To put into perspective 15 of the past 22 sessions (68%) have been selloffs in the S&P 500 – but the 7 up sessions (4 of them on Fridays) have been so ferocious, the market is actually up 20 S&P points over those 22 sessions. There is certainly little memory from day to day as each day’s headlines or rumors take everything with it.
Today the money is moving back into the pro cyclical areas which was another sign one would want for a sustained move. The euro is also strong today and that inverse trade has been the key one for markets.
Copyright © Market Montage
Tags: Bias, Bonds, Breakout, Cusp, Draghi, ETF, Fly In The Ointment, Fridays, Gaps, Juncture, Last Friday, Moving Average, Pivotal Point, Rallies, S Market, Second Time, Selloffs, Trad, Treasuries, Treasury Bond, U S Treasury
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Friday, August 3rd, 2012
by Del Stafford, iShares
Emerging market high yield bonds – about as risky as an asset class can get, right? After all, emerging markets are known for carrying a significant amount of risk, and high yield bonds are one of the more speculative sectors within fixed income. Put the two together, and aren’t you doubling down on risk? I thought the same myself before researching this very topic, but to my surprise I found that is not [always/necessarily] the case.
First, most investable emerging market high yield indices contain bonds that are issued in US dollars (USD), so with these indices there isn’t additional risk from owning other currencies. Also, emerging market high yield generally includes sovereign bonds (issued by a government) and quasi-sovereign bonds (issued by an agency backed by a government), while US high yield generally only includes corporate bonds.
Corporate bonds are typically viewed as riskier than government bonds, even when they have the same credit quality rating. In times of market volatility and stress, you can see that play out in what is commonly referred to as a “flight to quality”. For example, we saw this happen during the credit crisis of 2008 when the market largely sold out of corporate bonds and bought US Treasuries.
The sovereign and quasi-sovereign exposure in emerging market high yield caused it to behave differently from other risk assets during 2007-2009. The below chart shows correlations of emerging market high yield (Barclays EM High Yield Index), US corporate high yield (Barclays US Corporate High Yield Index), emerging market equities (MSCI Emerging Markets Index) and developed international equities (MSCI EAFE Index) to US equities (S&P 500 Index) during this time period. You can see that developed international equities, emerging market equities, and US high yield increased in correlation but emerging market high yield decreased in correlation.
In addition, when you look at historical volatility in the below chart, emerging market high yield has experienced comparable levels of risk to US high yield over the past seven years.
Now, the intent here isn’t to say that emerging market high yield bonds are for everyone, but rather to challenge investor assumptions about the investment’s risk profile. Investors interested in emerging market high yield debt should still consider whether it suits their portfolio needs (Matt Tucker’s recent post may be helpful).
Source: Markov Processes International (MPI)
Del Stafford, CFA is the iShares Head of Product & Investment Consulting and a regular contributor to the iShares Blog. You can find more of his posts here.
Correlation is a statistical measure that captures the degree of the historical relationship between the returns of a pair of investments or indexes.
Correlation ranges between +1 and -1. A correlation of +1 indicates returns moved in tandem, -1 indicates returns moved in opposite directions, and 0 indicates no correlation.
Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. It is widely applied in modern portfolio theory, where the past performance of securities is used to determine the range of possible future performance, and a probability is attached to each performance.
Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity.
Copyright © iShares
Tags: asset class, Barclays, Corporate Bonds, Correlation, Correlations, Credit Crisis, Credit Quality, Emerging Market, Emerging Markets, Fixed Income, Government Bonds, High Yield Bond, High Yield Bonds, International Equities, Ishares, Market Volatility, Markets Index, Sovereign Bonds, Time Period, Treasuries
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Friday, August 3rd, 2012
CNN Money reports Chinese buying of U.S. business at record pace
Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.
Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.
That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.
In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said.
Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. — which broke ground this year on a $100 million plant in Thomasville, Ala. — to avoid these tariffs.
What are the Implications?
China buying US businesses is a necessary part of correcting global imbalances.
As a direct function of trade math, China’s reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries.
However, don’t be deceived by the words “record pace”.
To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves.
Will Alarm Bells Ring?
Some might be alarmed by China buying US businesses.
Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China’s dependence on an unsustainable model of fixed investment.
Unfortunately, “record pace” is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be.
Don’t expect alarmists in Congress and union sympathizers to see it that way.
Tags: Ala, Bells, Chinese Firms, Cnn, Cnn Money, Copper Tube, Dependence, Foreign Direct Investment, Golden Dragon, Manufacturing Facilities, Record Pace, Research Director, Rhodium, Tariffs, Thomasville, Treasuries, Trillion, Tube Group, Warehouses
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Thursday, August 2nd, 2012
by Neuberger Berman Research
July 2012 – Investment Strategy Group
Despite hitting record lows earlier in the year, the yields on U.S. Treasury bonds continue to tumble. The 10-year rate ended last month at 1.62%, materially below the long-time monthly record low of 1.95% set in January 1941. Yields for 10-year Treasury Inflation-Protected Securities (TIPS) have been persistently negative since the fourth quarter of 2011 and continue to trend lower, implying that investors are paying increasingly higher prices for the relative safety these investments are supposed to provide. In this edition of Strategic Spotlight, we consider why yields continue to decline and the implications for investors.
A Mystery, But Is It?
Yields on long-term Treasuries have been declining since the 1980s, when they peaked along with inflation. Since the financial crisis of 2008, the continued reduction in Treasury yields has at times perplexed even the most astute investors. One prominent bond guru famously avoided them in 2010 to the detriment of his portfolio, and pundits who prematurely declared the imminent “death” of bonds couldn’t have been more wrong. In recent years, yields have moved even lower even though inflation has held fairly steady.
Over the longer term, nominal yields for long-term Treasuries generally follow inflation levels and growth expectations. When inflation rises, nominal yields typically rise to compensate for the erosion in purchasing power and, similarly, if growth expectations rise, the increase in attractive investment opportunities in the economy tends to result in rising real (after inflation) interest rates (see Figure 1). Oddly enough, inflation expectations (as implied by the difference between the nominal 10-year Treasury yield and TIPS yield) have held steady at around 2% and the decline in nominal rates has been driven mostly by declining real yields—all in the face of a positive, albeit slow, growth environment.
REAL YIELDS AND GDP TEND TO MOVE TOGETHER
So, what explains this somewhat unusual phenomenon? Since the onset of the financial crisis, bond purchases by the Federal Reserve have increased as it has implemented unconventional monetary policies, specifically quantitative easing and maturity extension programs (known to most as Operation Twist). Through these measures, which have tended to lower long-term interest rates, the Fed has sought to stimulate the economy and reduce unemployment at a time of low inflation. Another pressure on rates has come from foreign demand for Treasuries, which has generally been very strong, especially during periods of heightened market anxiety. In recent months, slowing purchases by emerging market central banks have been offset by flight-to-quality demand from European investors, who have also driven the nominal rates on certain German, Dutch and Danish bonds to negative levels. Meanwhile, U.S. investors have shown a lack of appetite for risk as flows to bond mutual funds have outpaced those into equities.
How Low Can Rates Go?
In theory, there is no bottom for bond yields. Declining inflation and continued risk aversion have historically caused nominal rates to fall. Real yields have been significantly negative in certain time periods, although admittedly when inflation was higher than today. Figure 2 shows that there have been two key periods since the 1920s in which real rates where very negative—during the Great Depression and World War II era, and in the 1970s when inflation spiked along with oil prices. Should global economies falter in the coming months, it’s possible that interest rates could move In theory, there is no bottom for bond yields. Real yields have even been significantly negative in certain time periods. lower (even turning negative on the short end), especially if the Fed engages in another round of asset purchases.
REAL RATES HAVE ‘GONE NEGATIVE’ IN THE PAST
Better Opportunities Elsewhere
It should be noted, however, that there are major risks in holding Treasuries with little to no yield. An end to the continued bull run in Treasuries would imply a reversal of some factors supporting it now, such as low inflation, deteriorating growth expectations and worsening prospects for the eurozone debt crisis. With global central banks launching unprecedented levels of monetary easing, potentially higher levels of inflation could hamstring the Fed’s ability to continue asset purchases – causing both inflation expectations and real yields to go higher. In addition, investors may realize that Treasuries might not be as “risk-free” as they assumed, particularly as the debate over the U.S. federal budget deficit intensifies later this year.
While interest rates could still move lower in the short term, we believe that the return profile for the asset class is skewed to the downside, especially given our base-case assumption of low but positive growth. We advise caution in holding excess levels of Treasuries and believe that other assets, such as high yield fixed income and high-quality U.S. equities, could be more attractive in this environment. Similar to buying tech stocks in the late 1990s with no sales and earnings, buying today’s Treasuries with minimal yields could prove hazardous for investors.
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Tags: Astute Investors, Attractive Investment Opportunities, Detriment, Financial Crisis, Growth Environment, Growth Expectations, Imminent Death, Inflation Expectations, Inflation Protected Securities, Investment Strategy, Neuberger Berman, Pundits, Purchasing Power, Record Lows, Relative Safety, Strategy Group, Treasuries, Treasury Inflation Protected Securities, Treasury Yields, U S Treasury, U S Treasury Bonds
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Wednesday, July 25th, 2012
It is not often we double-dip in the Sausalitan’s soliloquies but tonight’s glorious truthiness from Charles Biderman, CEO of TrimTabs, is worth the price of admission. After explaining that the only way he could be any more bearish is to be double-levered – and that he believes that besides “believing in miracles” this market will see the March 2009 lows once the market-rigging is fully exposed, he makes probably the most clarifying statement we have heard regarding our central-planners-in-chief. With regards to Messrs. Bernanke, Geithner, and Obama: “The most damage is caused by those who are not as smart as they think they are.” They continue to believe they are smart enough to fix all our financial problems (and Europe’s – if they would just listen to Timmay) by building a bridge over the recession – thanks to asset-buying and ZIRP. “The only problem is we are running out of bridge and are nowhere near recovery” is how he sees it and reflecting on the massive gains that have been made on short-dated Treasuries as the Fed (who is the one buying them) extends the ZIRP horizon – it is clear that this is nothing but a huge Ponzi scheme.
Tags: Bernanke, Building A Bridge, Central Planners, Ceo, Europe, Geithner, Horizon, Lows, Market Rigging, Massive Gains, Messrs, Miracles, Obama, Ponzi Scheme, Price Of Admission, Recession, Soliloquies, Treasuries, Trimtabs, Truthiness
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Saturday, July 21st, 2012
The Economy and Bond Market Radar (July 23, 2012)
Treasury yields headed modestly lower again this week. Retail sales were much weaker than expected. Inflation and manufacturing data were more or less in line with expectations, while housing data was mixed. By Friday, European financial concerns had resurfaced as Spanish 10-year bond yields spiked above 7 percent and hit new highs. Spain indicated its recession will likely continue into next year. U.S. treasuries remain a safe haven for global investors, pushing yields lower this week.
- Industrial production rose 0.4 percent, ahead of expectations and a bright spot in an otherwise lackluster week for economic data.
- Real estate lending in China jumped 20 percent year-over-year in the second quarter and already shows Chinese policy-makers are taking aggressive action to combat the ongoing global slowdown.
- Housing starts rose 6.9 percent in June and the National Association of Home Builders confidence index had its biggest increase since September 2002.
- Retail sales fell 0.5 percent and have now fallen for three months in a row, which bodes very poorly for second-quarter GDP growth.
- The Conference Board’s Leading Index fell 0.3 percent in June, also indicating lackluster growth.
- Auto sales in the European Union fell 2.8 percent in June for the ninth consecutive monthly drop.
- With growth tepid, the Federal Reserve will not only remain accommodative, it may increase accommodation in the next few months.
- Europe remains a wildcard with the markets shifting focus on a weekly basis.
Tags: Aggressive Action, Auto Sales, Bond Market, Bond Yields, Chinese Policy, Confidence Index, Economic Data, Financial Concerns, GDP Growth, Global Investors, Global Slowdown, Housing Starts, Market Radar, National Association Of Home Builders, New Highs, Quarter Gdp, Safe Haven, Shifting Focus, Treasuries, Treasury Yields
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Wednesday, July 18th, 2012
by Dodd Kittsley, CFA, iShares
One of the advantages to working for the largest exchange traded product (ETP) provider in the world is that you have a lot of data at your disposal. In my role as the Global Head of ETP Research for BlackRock, I deal in data every day, particularly as it relates to the in- and outflows of the 4500+ global ETPs currently in existence. As you can imagine, examining flows can be a great way to spot investment trends, take the temperature of the market and reveal sentiment shifts.
Right now, for example, global ETPs just experienced their largest first half inflows ever. ETPs attracted net new assets of $105 billion during the first half of 2012, representing a 16% increase on the $90.6 billion of flows posted during H1 2011. Total industry assets now stand at nearly $1.7 trillion.
Not surprisingly, fixed income ETPs were a main driver of growth. As global markets continue to be volatile, investors have increasingly been using these products to capture new and diversified sources of income. Fixed income ETPs attracted 41% of all inflows with $42.0 billion on the year, or 114% above 2011’s comparable YTD figure of $19.6bn. In fact, June was the 18th consecutive month in which global fixed income ETPs have attracted net inflows. Total assets invested in fixed income ETPs now exceed $300 billion and account for over 18% of total industry assets.
But here’s something you might not have guessed – within fixed income, investment grade corporate ETPs were the clear leader, bringing in $15.5 billion. Throughout this year, investors have consistently committed new money to the category, with monthly flows ranging from $1.7bn to $3.2bn. It appears that many investors may agree with Russ K’s feeling that investment grade debt is the place to look for relative safety (albeit less than Treasuries) with the opportunity for positive real yield.
So what do we think is in store for the second half of the year? Well, if volatility remains an issue (and Russ K believes it will), we expect to see the flows into fixed income ETPs continue (see chart below). In fact, if they continue to follow their current trajectory, FI ETPs could actually sextuple their assets over the next 10 years – from $300 billion to $2 trillion. As my colleague and fellow blogger Matt Tucker has said many times, investors are starting to realize that fixed income ETPs are simply a better way to invest in bonds.
Fixed Income Cumulative Net New Asset Trends
Never one to keep a good story to myself, I’ll be sharing interesting ETP flow data and related insights on a regular basis here on the iShares blog. And I’d love to hear from all of you – what questions do you have that our data might be able to answer?
Source: BlackRock Investment Institute
Tags: Assets, Blackrock, Cfa, Corporates, Diversified Sources, Dodd, Etps, Fixed Income Investment, Global Head, Global Markets, Investment Trends, Ishares, Nbsp, New Money, Relative Safety, Russ, Second Half, Sentiment, Treasuries, Trillion
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