Torsten Asmus/iStock via Getty Images
No, no, not that Bear, but this very special Bear. He has finally showed up again, after being missing for quite some time, to tell you the good news. High yield bonds are back above the inflation line and with a rating, an absolute maturity, and now some decent coupons and yields, we can all celebrate their return.
“Think it over. Think it under.”
– Mr. Pooh
The Bloomberg U.S. High Yield Index now stands at 8.19%, which is now more than 100 basis points over our average inflation rate. It has been gradually creeping higher, partially because of the Fed’s rate manipulations, but also because spreads have widened and yields have therefore risen.
This index was down -6.63% for the past year, but since the beginning of 2023, it has been up +3.52%. Compare this to our tech-heavy index, the NASDAQ, which was down -19.09% for the last 12 months and up +6.44% year-to-date. The Risk/Reward Ratio, in my view, is now favoring adding some bonds to your portfolios, or some bond funds, as I consider the “credit risk” of both indexes. I especially like floating-rate bonds and floating-rate bond funds at this point in our economic cycle.
With all of the layoffs in the tech sector, and a spat of declining revenues and profits, there is more trouble up ahead, in my opinion. In the past month alone, tech companies have cut nearly 50,000 jobs, according to CBS News, with a significant number more in the offing. In fact, 25% of all the layoffs in the last 12 months have been in the tech sector, which I take as a “sign of the times.”
I hope you are listening.
“If the person you are talking to doesn’t appear to be listening, be patient. It may simply be that he has a small piece of fluff in his ear.”
– Winnie the Pooh
With our flummoxed yield curve, some additional components have become important. The height of the yield curve is now the six-month Treasury Bill at 4.81%. Compare this to the benchmark 10-year Treasury that now yields 3.48%. Now, “credit risk” always increases with duration, you can trust me here, so buying some short-term high yield bonds now seems like a decent place to park some money until the Fed quietens down. By the way, I am not in the “pivot” camp, as I think that Fed may reach a point where it “stops” raising rate for a while, but in my view, any sort of “pivot” is some ways out.
A number of people at the Fed get my commentary, as well as people in the Treasury Department, and I would recommend that they pause for a while at an inflation rate of 4.50-5.00% so the economy does not get heavily battered by higher costs of borrowing and a weakening dollar. I have no problem with their 2.00% goal, but I think that it is a road that must be carefully trod, without causing more harm than good, for the economy and the markets. Also, as our country is now right up against our debt ceiling, a long continuation of raising rates is not exactly helpful for our national debt.
“I am not lost, for I know where I am. But however, where I am may be lost.”
– The Pooh Bear
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment