How the Financial Sector Is Reacting to the Steepening Yield Curve
The financial sector will likely be the most affected by the steeper yield curve.
The US 30-year Treasury (TLT) yield rose the least between August 31 and September 15, 2016.
In this series, we’ll compare yields across various developed markets (EFA) (VEA). We’ll also look at how a steepening yield curve affects the financial sector (XLF).
Although the markets have surged to record highs in the last two months, there are early warning signs you should watch. The recent decline came on Friday, September 9.
The relationship between the CBOE Volatility Index (or VIX) and the spread between high-yield bonds over ten-year Treasuries is highly correlated.
Looking closely at mutual fund and ETF flow data can provide some insight into how investors have approached the asset class this year.
Current low and negative yields in developed markets have led many to look outside of core fixed income asset classes for attractive income.
The correlation between oil and high-yield bond indexes is very high. Where oil goes, high-yield bonds follow.
The three-month Volatility Index (or VIX), which measures the implied volatility of options on the S&P 500 stock market index, is approaching record lows.
The surge of inflows into junk bonds indicates that the fear of recession in the US economy has faded, which has boosted investor confidence.
Led by improvements in production-related indicators, the Chicago Fed National Activity Index (or CFNAI) rose to +0.27 in July from +0.05 in June.
Yields on high-yield debt (HYG) (JNK) and spreads between high-yield debt and Treasuries both fell over the last year.
The global hunt for returns has turned US junk bonds into an attractive investment option.
The ten-year Treasury (IEF)(TLH) yields are currently testing their all-time low at around 1.5%.
It’s useful to analyze the historical returns of credit rating categories within emerging markets bonds.
There are several risks to investing in emerging market bonds right now. Emerging countries have been on a debt binge of sorts for the past five years.
Emerging market bonds have been doing extremely well over the past couple of months. EM debt funds have been in the green for seven consecutive weeks.
In this series, we’ll see why emerging market bonds are looking attractive, how the Market has gained position this year, and the risks emerging market bond investors face.
Investors may also want to consider a small allocation to BB rated emerging markets countries.
But emerging markets represent a diverse group of countries, and individually they carry varying levels of risk.