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The Corporate Bond Market Has A Tough Road Ahead (Morningstar)
“In the near term, we think that the corporate market has a tough road ahead of itself,” writes Dave Sekera at Morningstar. Sekera expects that as the Fed winds down its asset purchase program and for rates to get to a more normalized level the 10-year needs to rise above 3.5%. “Now historically, oftentimes, we saw that the Treasury spread between the corporate bond and the underlying Treasury bond would tighten as interest rates went up. However, we don’t really foresee that happening this time around.”
“So, for example, the average spread in the Morningstar Corporate Bond Index is 105 basis points over Treasuries right now. Historically, the tightest it ever got–in February of 2007–was 80 basis points. So, on the face of it, it appears as though you could have another 25 basis points of upside to get to those historically tight levels. However, the problem is that the average rating in the index right now is actually a single A-minus, and that’s lower than what the average rating was back in February of 2007 when [the Morningstar Corporate Bond Index] hit its tightest.
“…As such, going forward we really think that the corporate bond market is going to be much more closely tied to Treasury-bond returns than it has been in the past.”
Investors Searching For Income Should Look To Stocks (AllianceBernstein Blog)
In an ultra-low interest rate environment, Joseph Paul at AllianceBernstein writes that investors should look at stocks for income. “Dividend yields on US stocks today are competitive with fixed-income yields,” Paul writes. “At the beginning of August, the trailing dividend yield on the S&P 500 was 1.8%, not far behind the 10-year Treasury yield of 2.6%. And the highest-yielding third of US stocks boasts a dividend yield of 3.0%.”
“Dividends are actually more dependable than you might think. For the market as a whole, dividend growth was positive in 39 of the years from 1968 to 2013. Annual dividends only contracted during seven years. In the worst case, an investment producing $US100 in dividends in 2008, as the global financial crisis struck, would slump to $US80 of income in 2009 (Display, right chart). Yet by staying the course through 2012, annual income would be higher than the starting point.”
“…An equity income approach is probably more appropriate for investors with long-term goals, who can put their money away for an extended period,” he writes. “In such cases, we believe that equity income can be a reliable substitute for part of a fixed-income allocation.”
There Have Been Record Withdrawals From High-Yield Bond Funds (Business Insider)
The latest Lipper data showed that high yield bond funds saw $US7.1 billion in outflows in the week ended Wednesday, the largest outflows on record. Recent underperformance of US high yield credit has put back to the forefront of the market the vulnerability of this asset class to rising US yields, and to the coming tightening cycle in the US,” Societe Generale’s Ahmed Behdenna said in a recent note. “Market reaction to recent US positive economic news-flow reminds us that the Fed tightening (which will come one day!) means lower expected returns for the asset class.”
DoubleLine Funds’ Jeffrey Gundlach told Business Insider’s Sam Ro that he expects the 10-year yield to trade between 2.2% and 2.8%, with the risk that it goes below 2.2%. Wall Street analysts widely expected interest rates to rise this year, but on Friday the 10-year hit its lowest level since June 2013. And Gundlach, unlike most of Wall Street had said back then that rates would continue to stay low. “It’s really hard for me to identify why rates should go higher,” he told Business Insider.
While technology offers opportunities for advisors to be more efficient, Fidelity’s 2013 Insights on advice study found that they are largely still “challenged by integrating and utilising it,” writes Ed O’Brien in Investment News. “While you may feel cool sporting the latest technology in the office or with your clients, if it doesn’t solve your business problems or improve what you already do well, you won’t see the return on your investment,” he writes. So, he suggests that advisors ask themselves three questions before trying to pick out the right technology for their businesses.
1. “Will this technology make us more efficient?”
2. “Will the technology improve our client engagements?”
3. “Will implementing this technology disrupt our business?”
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