Monday, October 28, 2013

BLACKROCK: Now Might Be A Good Time To Buy Junk Bonds

With the Federal Reserve on a multi-year mission to keep interest rates as low as possible, investors seeking yield moved out on the risk spectrum from investment grade bonds to things like high-yield (or junk) bonds.

This shift made junk bonds pricier, forcing the risk-reward ratio to become unattractive.

However, with interest rates surging and bonds all over the world selling off in recent weeks, the opportunity to buy junk bonds might be now.

"High yield has been a popular trade for several years given the economic recovery and low default rate," write the analysts at BlackRock. "With the recent shift in interest rates and the economy still growing, the sector is attractive. Can investors continue to reap returns? We believe so."

Here's their chart:

Bond god Jeffrey Gundlach made a similar argument last week.

"The liquidation cycle appears to have run its course," said Gundlach pointing to junk bonds among other things.

Here's a slide from Gundlach's presentation showing how junk bond market may have inflected from its bottom.

Jeffrey Gundlach's Presentation DoubleLine Funds


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The Revenue-Weighted S&P 500 Is Smoking The Regular S&P 500

Notwithstanding the rockiness of the last six weeks, U.S. stock markets have had a very good first half in 2013. Drilling into the market is revealing.

The S&P 500 Index, represented by the ETF (exchange-traded fund) whose symbol is SPY (SPDR S&P 500 ETF), had a total return of 13.74% for the first six months of the year. The performance is one of the best first halves in recent times. If one examines the S&P 400 Mid Cap Index for the same period, the result is 13.81% when calculated using the ETF whose symbol is MDY (SPDR S&P Mid Cap 400 ETF).

Most notable is the outperformance of small-cap stocks. The S&P 600 Small Cap Index is captured by the ETF whose symbol is IJR (iShares Core S&P Small Cap ETF). That security had a total return of 16.29% for the first half of the year. Thus, approximately 2.5 additional points of return were obtained by representative diversification into small caps versus mid caps and large caps.

Note we are still within the S&P 1500 Index. The stocks that make up this index pass the screening and selection committee of Standard & Poor's. We will keep this commentary focused on the S&P 1500. That said, there is ample evidence in other sections of the nearly 6000 tradable stocks that dramatic underperformance or outperformance occurred.

One of the pronounced features of this year's first half is the persistent outperformance of revenue-weighted indices over capitalization-weighted indices. One can reach into the same stock market index basket using RevenueShares ETFs rather than the standard capitalization-weighted references from S&P. For example, RevenueShare Small Cap ETF (RWJ) had a performance for the first half of the year of 16.84% versus IJR at 16.29%. In other words, if you selected a revenue-weighted ETF structure versus a capitalization-weighted ETF structure in the small-cap arena, you would have added another 60 basis points to your returns for the first half of 2013.

This difference gets more dramatic when you look at the Mid Cap 400 Index. RevenueShares Mid Cap (RWK) delivered a 19.42% total return versus the capitalization-weighted MDY return of 13.81%. A total return 5.61% higher was a dramatic gain to be realized by using RevenueShares rather than capitalization weighting in the mid-cap sector. Mid caps by capitalization weight were essentially the same as large caps. The revenue-weighted ETF dramatically outperformed the cap-weighted one.

What about RevenueShares Large Cap? Here too, revenue weighting added excess return to an investor's portfolio. Let's compare RevenueShares Large Cap ETF (RWL) with its cap-weighted cousin (SPY). The total return of RWL for the first half of 2013 was 17.11%. The return for SPY was 13.74% for the capitalization-weighted distribution of the same stocks. In other words, you netted about 3.5 more points of return in six months by using a revenue-weighted ETF rather than a capitalization-weighted ETF.

RevenueShares ETFs had a stellar first half. They outperformed capitalization-weighted ETFs in small, mid, and large caps, though the component stocks within each of the ETFs are essentially the same. The major difference between the two ETFs is the stock weighting system used within them.

A note for readers and clients: Sometimes we get lucky. In the interest of full disclosure, which in this case is pleasant to offer, Cumberland Advisors can accurately say it is a holder of the RevenueShares Large Cap ETF (RWL) and Small Cap ETF (RWJ).

We do not hold the RevenueShares Mid Cap ETF. Oh, well, you cannot win all of them.


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BANK OF ENGLAND: We're Looking Into Adopting Forward Guidance

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Markets More: Bank of England Mark Carney BANK OF ENGLAND: We're Looking Into Adopting Forward Guidance Sam Ro Jul. 4, 2013, 7:02 AM 144 Tweet!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs");EmailShare on Tumblr

mark carneyREUTERS/Chris Wattie

Bank of England Governor Mark Carney

See Also The George Clooney Of Central Bankers Just Started An Incredibly Difficult Job: Saving The UK Economy ALBERT EDWARDS: Mark Carney May Become 'One Of The Most Ruinous Central Bankers Ever' ROSENBERG: In 2007, I Had A Conversation With Mark Carney That Sent A Chill Up My Spine The Bank of England is keeping interest rates and its asset purchase plan unchanged as expected.

But in an unusual move, the BoE issued a statement, which it typically does only when it makes a change in policy.

Some are attributing this to new BoE governor Mark Carney, who appears to be pushing for more transparency.

"The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds," noted the statement.

Forward guidance is one of the tools employed by the U.S. Federal Reserve in its effort to be more transparent.

Here's the full statement:

Bank of England maintains Bank Rate at 0.5% and the size of the Asset Purchase Programme at £375 billionThe Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.  The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.

Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile.  In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.  Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term.  Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures. At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy. The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds.  This analysis would have an important bearing on the Committee’s policy discussions in August. In the light of these considerations, the Committee voted to maintain the size of its programme of asset purchases financed by the issuance of central bank reserves at £375 billion.  The Committee also voted to maintain Bank Rate at 0.5%. The minutes of the meeting will be published at 9.30am on Wednesday 17 July. To embed this post, copy the code below and paste into your website or blog.600px wide (preview)400px wide (preview) 300px wide (preview) Alerts Newsletter URL Recommended For You Insane Footage Of A Leopard Attack In The Wild   Insane Footage Of A Leopard Attack In The Wild   More: Bank of England Mark Carney Get Alerts for these topics »

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