The Coming Bond Market Collapse: How To Survive...
Shares of tech-focused bank SVB Financial dropped another 40% in the premarket Friday, building on Thursday's 60% plunge. The stock was under pressure in the previous session after SVB Financial announced it planned to raise more than $2 billion in capital to help offset losses in bond sales.
The Coming Bond Market Collapse: How to Survive...
If that leads to reduced participation by these investors in the Treasury market, then new buyers for US government debt will need to be found, especially after the rules come into effect in the coming years.
Yields on high-grade corporate bonds appear compelling. However, from a credit-spread perspective, we see too little compensation above risk-free Treasuries given the late-cycle risks in the market.Spreads do have room to widen, but a renewed investor appetite for higher-quality bonds may put a ceiling on how wide spreads could drift.
We expect tighter financial conditions to crimp corporate finances broadly. Rising stars (company upgrades from high yield to investment grade) outpaced fallen angels (downgrades from investment grade) by a wide margin over the past two years. Still, we expect more downgrades in 2023, especially in lower-quality cyclical segments. The depth and duration of any market downturn would determine the impact, but we see that most companies are prepared for a normal recession.Within a more modest allocation to investment grade, we see value in higher-quality issues within financials, utilities, and noncyclical industries. We prefer noncyclical companies because they tend to retain earnings resilience during economic downturns. Though bonds of cyclical companies can have higher spreads at challenging times, they currently trade in line with noncyclicals, another reason we see noncyclicals as the better bet.
Some stabilization in U.S. Treasury rates could be a catalyst for emerging markets (EM) inflows. We saw that occur over the last few months of 2022 during a period of light EM bond issuance, and historical data suggest an improving trend. That should bolster the supply/demand picture for EM, as we see another year of net negative supply.Our more favorable view on the sector late last year benefited from the 125 bps rally in spreads, but it leaves us less constructive today with valuations no longer cheap.Country fundamentals are broadly stable, but we anticipate significant credit differentiation as the global economy slows down in 2023. This will create opportunities for relative value and active management.Our preference for higher-quality bonds is balanced by the fact that spreads in investment-grade EM are very tight and additional borrowing is likely. The high-yield segment of EM offers much more compelling valuations but is also the most vulnerable to further economic disruption.We see 2023 as a market where the best strategy is to be defensive but agile, with enough liquidity to act on new opportunities that arise.
After all, if individual investors and advisors had allocations to municipals with yields barely over 1% at the beginning of 2022, then they should now salivate at the prospect of yields exceeding 3% (before adjusting for tax benefits). With tax-loss harvesting opportunities ending, we expect that high-earning investors will be motivated to increase their tax-exempt holdings over time. Higher yields not only mean greater income but also greater portfolio stability if a deeper recession transpires.The tax-exempt primary bond market was busy at the start of 2022, but higher rates stunted the pace of issuance later on, consistent with our forecast. The supply picture going forward is uncertain, as usual, yet future issuance will likely remain subdued as the cost of borrowing is higher and municipal balance sheets are still flush with cash from pandemic-era stimulus.Both inflows and lower supply should support municipal valuations in 2023. The quick 4.1% rally in the fourth quarter indicated that these effects are underway. The rebound may lure more investors back with attractive yields and reduce the possibility of negative returns this year. With tax-equivalent yields of 6.0% (or meaningfully higher for residents in high-tax states who invest in corresponding state funds), municipals offer great value compared with other fixed income sectors and potentially even equities, especially with the odds of a recession increasing.
Note: Chart represents change in yields above U.S. Treasuries of similar duration for U.S. corporate bonds, and the difference in yields between AAA and BBB rated segments of the municipal market.
Thus, we believe the municipal bond market has already broadly priced in a recession. Unlike prior economic contractions, this time it will be downgrade activity that catches up to current spread pricing, not the other way around.
Christopher Alwine is global head of Credit and Rates, where he oversees portfolio management and trading teams in the United States, Europe, and Asia-Pacific for active corporate bond, structured product, and emerging markets bond portfolios. He joined Vanguard in 1990 and has more than 20 years of investment experience.
Mr. Alwine was previously head of Vanguard's Municipal Group. There, he led a team of 30 investment professionals who managed over $90 billion in client assets across 12 municipal bond funds. He has served in multiple roles throughout his career in the Fixed Income Group. His experience includes trading, portfolio management, and credit research. Mr. Alwine's portfolio management experience spans both taxable and municipal markets, as well as active and index funds. He is also a member of the investment committee at Vanguard that is responsible for developing macro strategies for the funds.
The European Central Bank (ECB) launches its unprecedented Securities Market Program. The program allows the ECB to purchase government bonds of struggling sovereigns, like Greece, on the secondary market in order to boost market confidence and prevent further sovereign debt contagion throughout the eurozone. Finance ministers also agree on rescue measures worth 750 billion euros, or nearly $1 trillion, for struggling eurozone economies.
SVB collapse: After the Silicon Valley Bank (SVB) crisis, global equity markets and US dollar are under stress. In last fo sessions, US dollar rate has retraced from three month highs as Dollar Index has slipped from around 106 levels to around 103 levels while key benchmark indices on Wall Street lost up to 2 percent in Friday's session. However, gold rates today climbed to the tune of $1,880 per ounce levels, logging around $65 per ounce spike since Thursday's lows of around $1,815 levels. After failing to sustain above the 4 percent yield level, US bond yield has once again started to appreciate.
According to investment experts, this SVB collapse followed by Signature Bank closure, will hit bond yield, especially in treasuries badly. However, this is restricted to US bond market only, for Indian treasuries, which are regulated by Reserve Bank of India, this crisis won't have much impact. For, mutual fund investors, those Indians investing in international and international hybrid funds will be affected by the recent SVB and Signature Bank collapse.
Impact on bond marketOn how bond market investors would be affected by this banking crisis, Manikaran Singhal, Founder at goodmoneying.com said, "Indian bond investors need not to worry about this banking crisis in the US. But, for the US bond investors, those who deal in treasuries will be negatively impacted by this crisis. So, those who deal in the US treasuries, are advised to take a pause for near one week and assess the US bond market on how this ban king crisis pangs out in next one week."
Most governments borrow money; these funds are used to improve infrastructure, to smooth spending across the economic cycle, and in many cases to buy political support and help governments remain in office. Governments borrow from other governments, from multilateral development institutions such as the World Bank, from commercial banks, or by issuing bonds in private capital markets.
The covered bond market is traditionally an important source of funding for banks in the euro area. This market segment suffered heavily from the financial crisis. With EUR 60 billion, we have chosen a volume significant enough to support market functioning but not so large as to dominate market developments. Still, compared with bond purchase programmes in some other major countries, the amount spent by the ECB in the context of its covered bond programme is fairly modest. However, this reflects the fact that the primary role of the ECB is to act as a catalyst for this market, not as a market maker.
Mr Kiyosaki said he is "concerned" about Credit Suisse - the world's eighth largest investment bank - due to the "perfect storm" caused by the bond market crash and the upcoming retirement of his generation.
The fallout from the closure of three U.S. banks in the span of a week is making it near-impossible for analysts to determine a fair valuation for stocks, as volatility in the U.S. government bond market surges to its highest level in nearly 15 years, market strategists say.
This essentially means traders of Treasury options and interest-rate swaps are bracing for the yield on the 2-year Treasury note to swing by 12 or 13 basis points on average every day over the coming months. When market conditions are more placid, these rates typically see much smaller moves of between two and three basis points a day, said Scott Ladner, chief investment officer at Horizon Investments.
I'll start by saying I like American Airlines (NASDAQ:AAL). Sure, the seat rows seem to have magically gotten closer together over the years, and post-COVID flying has not been the same experience. But I've also received unexpected kindness from gate agents, ticket counter agents, and flight attendants across America. As much as people complain about airline customer service, as a frequent AAL customer, I can say that I've been pleasantly surprised on several occasions, especially when something initially goes wrong. Since April, alcohol service is back and masks are optional! The world is getting back to normal. But during the pandemic, major airlines lost billions of dollars. Thanks to the quantitative easing policies of the Federal Reserve, American Airlines was able to borrow tens of billions of dollars that it needed to continue operating. But now, as the Fed pulls its blanket support from the bond market, there are questions about whether American Airlines will be able to continue refinancing its debt at viable interest rates. The stock has held its own as consumers continue to spend on summer travel. But winter is coming. 041b061a72