by Bryan Perry
November 28, 2023
It appears that global bond yields have fallen across the spectrum, with the benchmark 10-year yields falling in tandem, after peaking in October. Here are recent yields, compared to one month ago:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The dash from cash into fixed income, in all its forms, has been quite dramatic lately. Everything from government sovereign debt and government agencies, to investment grade corporate, non-investment grade corporate, municipals, preferred bonds, and CDs has been met with a huge appetite from both institutional and retail investors. The rally in the U.S. 10-year Treasury, triggered by the tame CPI and PPI readings, caught much of the investing world flat-footed, as they were still entrenched in the Fed’s ‘higher for longer’ narrative, with the added fear that another rate hike might be necessary to finish the job.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Instead, the market decided that not only was the Fed done raising rates, but two or three quarter-point rate cuts were now a likely scenario for 2024. By historical measures, the recent drop in yields was radically sudden, almost an overnight reset of expectations, brought about by a change in narrative and growth projections that point to a marked slowdown for the current quarter. The Atlanta Fed’s GDPNow shows Q4 growing at a 2.1% rate – neither too hot nor too cold – just what the bond market wants to see.
This number will likely get a bump upward following record Black Friday sales, according to Adobe Analytics, up 7.5% from last year. Lower gas and food prices over Thanksgiving also boosted consumer sentiment, amid strong wage gains and a strong labor market, offsetting record consumer debt levels.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Under the assumption that inflation reaches the Fed’s 2% target rate, it stands to reason they will not raise rates further, to avoid paying too steep a price on federal debt, and to see how healthy the consumer seems in early 2024, after this year’s holiday shopping season. So far, the consumer has surprised to the upside.
Against this wait-and-see backdrop by the Fed, it’s my view that the base case for the U.S. averting a recession in 2024 is more credible now than a month ago. For investors that are willing to absorb more risk, non-investment grade bonds in the form of leveraged closed-end funds in this environment, offer yields that can take some of the sting out of inflation without having to deal with single-bond investing.
To be sure, having a guaranteed 5% return on short-term Treasuries, agencies, investment grade corporate debt and money markets has been all well and good, but it doesn’t beat the cost of inflation and taxes in the real world. It’s been a great place to hide, but hardly a place to get ahead of the rising cost of living.
Now, with wind at the back of the bond market, it might make sense to add some high-yield risk, with the economy looking more stable, going forward. Bear in mind that most closed-end high-yield bond funds employ an average of 20% to 35% leverage to generate 10%+ yields in diversified portfolios with average maturities under seven years. For example,
BlackRock Corporate High Yield Fund (HYT), with assets of $1.9 billion and a 10.8% current yield. It pays out monthly and trades at a 6.5% discount to Net Asset Value (NAV). The fund has 1,181 holdings that make for a widely diversified portfolio in the types of bonds that most retail investors would find very difficult to purchase through their brokerage accounts. (Institutional investors gobble up the best high-yield issues as they become available with many bonds trading in lots of $100,000 or more.)
Again, this category came under fire when the Fed began raising rates and the cost of leverage soared. But, there are positive changes under way, and by conducting some active research, the corporate high-yield space can deliver double-digit yields and potential for capital gains, if the economy maintains steady growth while inflation continues to trend lower, and the Fed ultimately begins to lower rates.
If these factors come into line together, total returns for high-yield debt could be downright impressive.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
While America Gave Thanks, the World Was in Revolt
Income Mail by Bryan Perry
The Bullish Case for U.S. High Yield Bonds
Growth Mail by Gary Alexander
Beware Hot, Trendy Sectors (I Favor Unloved Essential Sectors)
Global Mail by Ivan Martchev
New Volatility Lows for 2023 Indicate a Coming Overdue Small Correction
Sector Spotlight by Jason Bodner
The Market Roller Coaster Starts Rising Again
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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