Why Gundlach Warns of Stock and Bond Markets’ Negative Correlation
When the Fed hike rates—which is also to say the US Treasury will pay more interest on bonds—the stock market might see fund flow toward the bond market
Jeffrey Gundlach also warned about the high-yield market (HYG) (JNK). He said the “clock is running out” for energy companies (IEZ) due to low oil (USO) prices.
Preferred stocks have typically seen the highest yields in the investment-grade universe, which makes them an attractive alternative to other high yielding securities.
Bonds and stocks are negatively correlated. This is why bonds can act as a ballast in your portfolio, and thus the case for bonds is still strong while building with buffer.
While high yield bonds could be an avenue for higher yields, they seem risky given the slowing global economy and low oil prices. In such a scenario, preferred stocks could offer some value.
You could argue that the Fed waited too long to raise rates, and frankly that it’s going to catch the economy on a decline.
Following Friday’s jobs numbers, not only did the implied probability of a Fed rate hike rise to 70%, but the degree of the expected hike also increased from 0.125% to 0.375%.
According to data from S&P Capital IQ LCD, the US leveraged loans market saw an allocation of $31.9 billion worth of senior loans in October 2015. This was 163.2% higher than the $12.1 billion priced in September 2015.
According to data from Lipper, leveraged loan funds saw outflows worth $753.6 million in October until the week ending October 28. This is compared to net outflows of $2.1 billion in September.
According to Lipper, net inflows for high-yield bond funds totaled $7.6 billion through October 28, compared to outflows totaling $1.9 billion in September.
E-commerce and payment solutions provider First Data Corporation (FDC) issued junk bonds worth $3.4 billion on October 29. This was the largest issue of October.
High volatility in financial markets ensured low activity in the primary market of high-yield bonds in October. Dollar-denominated high-yield debt amounting to $9.4 billion was issued in October 2015.
The S&P 500 index, tracked by the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV), rose 8.3% in October.
Currently, the ten-year is yielding a little below 2.1%, which is well below its 20-year average of 4.3%. However, there’s still a case for holding long-dated Treasuries.
The difference between the yields on corporate bonds and Treasury bonds of the same maturities is often known as the “credit spread.”
Today’s low yield environment suggests investors should consider less traditional approaches. INC gives you equal exposure to interest rate and credit risk.
Credit markets tend to improve when the economy is improving. The possibility of a default on corporate bonds (LQD) drops, thus causing their yields to fall.
Since Treasuries (TLH) do not have any credit risk, the yield on them is the reward you get for taking on interest rate risks.
The ten-year Treasury (IEF) is currently yielding 2.0%, which is much lower than its long-term average of ~4.5%.
Low-interest rates have done their part in making high-yield debt look shinier, according to yield, to an investor.