But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Why you should consider buying high yield bonds
I continue to see relative value in select areas of the fixed income market such as tax-exempt bonds, commercial mortgaged-backed securities (or CMBS) and U.S. high yield.
In this environment, many investors are still determined to wait out the bond market, believing that rates will eventually normalize and provide investors with a risk-free 5% yield, though this isn’t likely to happen anytime soon.
Stubbornly low yields have made income tough to come by in recent years, and they have sent investors searching for yield and income wherever they can find it.
The US Department of the Treasury increased the weekly auction amounts for four-week, or one-month, T-bills last week. The issuance was $40 billion.
The auction demand for 13-week Treasury bills (or T-bills) was almost unchanged from the previous week. The bid-to-cover ratio came in at 4.7x.
The US Department of the Treasury held the weekly 26-week, or six-month, Treasury bills (or T-bills) auction on November 10. T-bills worth $28 billion were on offer.
Despite unchanged issuance, demand for 52-week T-bills was weak. The bid-to-cover ratio fell 7% to 3.6x month-over-month—the lowest level recorded since December 2009.
Treasury yields are closely related to economic data. Bullish economic data tends to raise yields. This lowers bond prices and vice versa.
After trending to 14-year lows over the past two weeks, the four-week moving average for initial jobless claims moved up by 6,000 to 285,000 in the November 8 week.
The most important release was the monthly retail sales for October. The report is an important yardstick for consumer confidence and spending.
The US Treasury holds monthly auctions for three-year Treasury notes (or T-notes). Yields for the three-year T-notes are related to movements in the federal funds rate.
The US Department of the Treasury holds a ten-year Treasury (IEF) notes auction every month. The ten-year Treasury (UST) yield is a benchmark yield for financial markets.
The monthly auction for 30-year Treasury bonds (or T-bonds) was held on November 13. Auctions are watched by stock and bond investors.
It’s important that investors are updated on Treasury (TLT) yield movements. Treasury yields are used as benchmarks to determine the required returns on other assets.
You’ll find that the principal appreciation from falling rates at the long end (IEF)(VCLT) may make up for a large part of the shortfall in yields at the short end (SJNK).
US GDP growth has averaged ~2.5% from 1994 to 2014 in Q3. GDP growth is expected to range between 2.0% and 2.2% in 2014 and between 2.6% and 3.0% in 2015.
A barbell strategy tends to do well when the yield curve flattens. When the curve steepens, the strategy tends to underperform. Let’s consider both these possibilities in the current context.
Normally, a laddered fixed income (BND)(AGG)(JNK) portfolio tends to outperform a barbell portfolio when rates are falling. The barbell would generally outperform the ladder when rates are rising.
You’ve read about barbell portfolios and their advantages in the previous parts of this series. In this part, we’ll discuss the merits of other often-used fixed income (LQD)(HYG) strategies to profit from rising rates.
Portfolio positioning will depend on your interest rate outlook. So it’s important to keep track of where rates are headed. As we mentioned earlier, this is an active strategy that requires periodic monitoring and reinvestment.