There’s nothing dull these days about the bond market, which is exhibiting an unforeseen, profound level of strength that’s spread through the various asset classes on the fixed income side, and that continues to remain unexpected for the most part.
As of Wednesday the Barclays US Aggregate Index had notched a year-to-date return of 3.62 percent; the 10-year-plus index was up a crazy 9.39 percent, and the Barclays Intermediate High Yield Index was up 4.05 percent. Looking at one of their competitors, the Bank of America/Merrill Lynch Corporate Index has so far netted a 5.39 percent return year-to-date while the Merrill High Yield CCC and Lower Index is up 4.45 percent. So that’s pretty solid returns across the board – comparing favorably with the S&P 500’s total return of 4.3 percent so far this year. Explaining how it’s all happening in the bond market is the more difficult task, but let’s give it a whirl.
NEW YORK (Reuters) – U.S. and European bond markets rallied and benchmark yields fell to multi-month lows on Wednesday in expectations of stimulus from the European Central Bank next week and on month-end buying from U.S. funds.
Stock markets were largely flat. Wall Street dipped slightly after the benchmark S&P 500 .SPX set a closing record on Tuesday. The MSCI World Index .MIWD00000PUS was up fractionally to 420.27 points, less than 2 percent from its lifetime high.
There are a million cliches people lean on to explain some aspect of the market that’s otherwise baffling, and the key one this week – the cliche du semaine – is something along the lines of, “You don’t want to short a dull market.”
And indeed this has been a bit of a dull one lately. The S&P 500 grinds to new highs, accompanied by the Dow transports, with the industrials not that far off.
Shares of Hewlett-Packard fell late in Thursday’s session after the company inadvertently released results just before the closing bell, but the year hasn’t been so bad for HPQ at least where its stock is concerned – shares are up about 13.6 percent so far in 2014, part of solid performance by a group of stocks Goldman Sachs identifies as “weak balance sheet” companies, the kind of phenomena that occurs when the economy seems to be in recovery and financial conditions are favorable, which they are right now – low rates, high levels of borrowing, reduced covenants in loans and further appetite for risk.
That may change as financial conditions tighten -if Treasury rates start to rise, for instance, or if banks throttle back on lending – but at least HPQ has something going for it right now. The company is cutting 16,000 jobs as it tries to revive its moribund profit margins and reverse what is now 11 straight quarters of sales declines. Companies with weak balance sheets in Goldman’s screen such as HPQ, Time Warner, Norfolk Southern and Delta Airlines generally post lower per-share earnings growth and weak sales growth – often companies in more mature industries or that find themselves left behind one way or another.
Investors will get a look at the Federal Reserve’s thinking later on Wednesday in an otherwise quiet week when the Fed releases minutes from its April get-together. There may be a bit in the way of more up-to-date thinking in some of the scheduled Fed speeches, notably Bill Dudley of the New York Fed, along with Fed Chair Janet Yellen later in the week.
The minutes from February’s meeting were instructive – they clung to the Fed’s typical modus operandi in suggesting that economic difficulty early in the year was largely due to weather-related issues and pointed to improved outlooks in various areas, while still noting weakness in housing and consumer spending.
The markets are in a bit of an odd spot right now, with the biggest quandary that of the bond market, where U.S. yields have gone into a dive in recent days to touch their lowest levels since October.
What’s unclear is how much to attribute to fears of a slowing economy, changing dynamics like reduced mortgage securities issuance or increased pension fund liability-driven purchases. There are also technical factors like the rallies in sovereign debt markets like Spain, Italy and Ireland, none of which have the credit profile of the United States, big short positions among those who still believe this can’t continue much longer, and the overarching “quantitative easing forever” stance out of the European Central Bank and Bank of Japan, to say nothing of a few other central banks that are still on an easing path. (Really, it’s not as if the U.S. Fed is all that stingy right now when it comes to stimulus. Yes, it’s pulling back, but it’s pulling back from negative territory, basically.)
Who had the mo-mo mojo and who was crushed by the steamroller becomes evident late in the day Thursday when filings from major hedge fund managers – those things known as 13-Fs – are released.
Hedge funds were hit hard by the decline in the likes of Twitter, Tesla, Netflix and a lot of other names that long/short investors had favored throughout 2013 and early 2014, but their substantial decline cut the legs out of a lot of leveraged managers looking to continue to profit on the big run-up in that sector.
We come not to bury J.C. Penney, because everyone else has done that a few times over already.
Headed into the last gasps of earnings season, overall earnings growth for the quarter is currently 5.5 percent – much better than the 2 percent expected at the outset of reporting season and trending back in the direction of what had been expected Jan. 1 before, well, before anybody knew anything at all.
The monthly inflation indicators have been forgotten men in recent years, notable only when investors engaged in their brief freak-outs about deflation that accompany weak economies from time to time. This week’s release of wholesale and retail inflation figures is getting a bit more attention as the Federal Reserve closes in on the day when it will no longer be buying bonds on a monthly basis and turns its attention to interest-rate increases.
The 10-year note’s yield has hovered around 2.65 percent in recent weeks, and the rapid removal of stimulus suggests markets are pretty unclear when it comes to the inflation outlook, in that, well, they don’t see much. The Fed doesn’t see it either – they talk about how they expect price normalization, probably hoping that at some point during Janet Yellen’s tenure that the past experience of rising prices in a late-cycle economy comes to pass here as well. Yet it hasn’t happened — and so the Fed revises its inflation forecasts lower, always sure to maintain some consensus estimate in the far-off future of that coveted 2 percent inflation level.
Stability is the name of the game right now in equity markets – something that can be seen in the daily moves in various speculative sectors and how investors react to outside influences like Russia and Ukraine (really, the primary factor motivating the more wild ups and downs in the stock market at this point). Signs that the tensions may be thawing – and we’ve seen this movie before – contributed to a rebound in the Nasdaq and other indexes later in the day to leave the tech-heavy index basically unchanged on the session.
But that didn’t help the biotech stocks, and the cloud names like Workday and Salesforce.com (now riding a four-day losing streak), and the sharp declines in these names is something that the folks at Bespoke Investment Group suggest is a phenomena that newer investors haven’t seen before. That is, when stocks just keep falling, and it shows that the break in momentum in these names hasn’t been arrested. “It’s rare for a market to become that information-insensitive (in either direction), so this has been a great learning opportunity for traders that haven’t seen a similar sort of move,” they wrote. It also gives lie to the idea that this was a tax-related selling issue. While those stocks have tended to pop up with the market – and this morning’s jump in futures shows that investors really do have Ukraine close at hand even if the effect is a third-order one – but any jump in the Nasdaq has been a selling opportunity for those names.