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Why high yield bonds offer an investment opportunity
High yield bonds have come under pressure lately, and as a result, are now looking relatively attractive. Spreads recently widened out to the highest level in a year.
Investors should be positioned for a slow growth environment, not another recession, and should consider raising allocations to assets that can still do well amid meager growth.
In addition, many market watchers are concerned about slowing growth in the Eurozone. While the region is unlikely to boom anytime soon, there are some signs that any further slowdown there should be modest.
Despite the recent global growth scare, a relatively strong U.S. economy continues to suggest that the Federal Reserve (or Fed) will tighten monetary policy sometime in the first half of 2015.
Though growth in most of the developed world, as well as in China, does appear to be decelerating, there are a few bright spots, including India and the United States.
The International Monetary Fund (or IMF), for instance, reduced its estimates for global growth, and many investors are now worried that another global recession could be on the horizon.
After last week’s sell-off, many investors are worried that another global recession could be on the horizon. Russ provides his take.
Dr. James Bullard, head of the St. Louis Fed, called for putting off the tapering of bond purchases last week. This was surprising, as several times this year he’s called for a faster timeline to increase the Fed funds rates.
Despite the auction size rising slightly, the bid-cover ratio slumped ~19.3% to ~3.7x, week-over-week. This was the lowest since the auction held on October 8, 2013. The ratio has averaged ~4.4x for auctions held in 2014.
Despite unchanged weekly supply, the bid-cover ratio declined by 14.3%, week-over-week, to finish at 4.3x. The absolute value of bids made was also lower.
The bid-cover ratio fell at last week’s auction, due to the higher supply of Treasury bills. The absolute value of bids was higher at the auction.
Market demand, consisting of direct and indirect bids, fell at October’s auction. This was due to lower bidding from indirect bidders.
The higher market volatility (VXX) resulted in major U.S. indices including the S&P 500 Index finishing down for the week ended October 17. The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, fell by 1.1% over the week.
Last week, the demand for U.S. Treasuries rose primarily on heightened global risks. Fears of a recession in Germany and Europe sent ten-year German government bond yields tumbling to 0.74% last week, their lowest ever.
Financials, at 60% of the week’s issuance volumes, made up the largest sectoral component. Consumer sector issuers were the second-largest category last week, accounting for 20% of the week’s volumes.
Primary market trends inform investors about the terms at which new debt is priced. These help you assess how your investments are performing in terms of yield.
This series will analyze major trends in the primary and secondary markets in U.S. investment-grade debt. Volatility, as measured by the VIX (VXX), or the index commonly known as the “fear factor,” spiked to 25.27 on October 15.
Italy’s ten-year government bonds spread against Italy’s ultra-safe German counterpart closed at 176 basis points on October 16. Yields on ten-year Italian bonds reached as high as 2.71% that day and closed at 2.58%.
After four years under a rescue program by the IMF, the EU, and ECB, Athens has largely repaired its finances.
While much of Europe is stuck in stagnation, François Hollande, the president of France, commented, “We are not doing reforms to please” but “because it is in our interest,” on Friday, October 17.