The yield on the benchmark 30-year note sank to a new low on Wednesday as more fretting in the capital markets spurred a push for long-term safe haven assets like government debt. This inverted the yield curve even further, which is typically a recession signal.
In the meantime, fixed income investors are looking for yield anyway that they can get it.
“There’s just a huge Asian bid for any kind of yield,” said Tom di Galoma, head of Treasury trading at Seaport Global Holdings. “It’s kind of my feeling that you just don’t have enough fixed income in the world to actually satisfy the demand. It’s kind of a one-way trade.”
“But my feeling is that interest rates are telling you that there’s some very bad news down the road,” he added. “We don’t know what that is, but that’s what’s being signaled to me.”
Quality is Key
There are opportunities in other areas of the bond market, such as corporate debt. They key, however, is focusing on quality.
“The search for risk-free positive yields, worldwide, drives down our interest rates on Treasuries, just 2% on 30-year paper and wavering,” wrote Martin Sosnoff of Forbes. “Meanwhile, the fear of recession spreads, keeping a lid on high-yield paper, BB credits and below. This is pure opportunity. I don’t see their fixed charges coverage shrinking drastically. Neither, do you see the Chinese government selling $1 trillion of our Treasuries and moving elsewhere. Where?”
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
Low Yields a Boon?
Still, low yields can also be a boon for the economy.
“Actually, low interest rates are cause for rejoicing,” added Sosnoff. “Not only is the cost of leverage much lower for us as players, but the Federal government saves some hundreds of billions in refinancing outstanding Treasuries. The Fed should be lengthening debt maturities and everyone should refinance his home mortgage or consider home ownership.”
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