+ intriguing negative-yielding bonds & how to search for high yields
|Oct 19|| 3|
Hope you had another financially successful week! In this week’s edition of the Gist, we’ll give you an updated outlook on 2020 recession, share with you our thoughts on finding high-yield income funds and discuss why negative-yielding bonds exist.
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So here are your questions for today’s edition:
Can you give us an update—how likely is it that we’re going to have a recession in the US before the next election (in November 2020)?
I’m looking for high-yield funds to invest in… I need some income now. Can you help me with the selection process?
What’s the deal with negative-yielding bonds? Why do they exist, and are we likely to have them in the US?
Let’s give you the summary first.
It’s hard to say whether we’ll have a recession in 2020. Trade wars and global economic slowdown are certainly not helping. But consumer and business sentiment is still running high—see DoubleLine’s sentiment trendlines below. Most analysts estimate the likelihood of a recession in 2020 between 30% and 50%.
To find out about high-yield investment options, you can check out your broker’s ETF and/or mutual fund screener, or ask Finny for “high yield fund” or “high yield ETF”. Once you find your target investment funds, please read their prospectuses and understand the underlying risks of those funds. You can also compare them here.
Certain governments (most notably in the European Union and Japan) mandate buying central-bank-issued negative-yielding bonds. The majority of institutions that buy them are regulated by the government and include pension funds, banks and insurance companies.
Here are some data points supporting the likelihood of a recession in 2020:
two-year and 10-year Treasury yield curve – a closely followed recession indicator – have inverted a couple of times already;
US manufacturing is contracting;
investments have slowed down and confidence is dimming because of geopolitical trade wars and slowing global growth.
On the contrary, US consumer and business sentiment is still running high, and US unemployment is record low. In July, NY Fed estimated the recession probability at 32% in the next 12 months.
It’s important to note that high-yield securities comes in various shapes and forms—they could be high-dividend-yield stock funds, corporate debt, lower-grade or emerging market bonds. Once you find out your target securities, make sure to read their prospectuses, understand their holdings and risk levels. You can use the AskFinny comparison tool to learn about the relative performance of those securities.
Here is an example from BlackRock about three popular high-yield ETFs covering three different market segments: corporate preferred stocks, high-yield corporate debt and emerging market bonds.
Negative-yielding bonds are a particularly foreign concept to US investors. Bonds are supposed to pay the owner of capital something to pry the money out of their hands, not charge them for it.
The good news is that US Treasuries, while hovering near all-time lows, still yield above 1.5 percent. But some market observers are now warning that the US could be paying negative bond rates, too, if there’s another recession.
In the end, negative-yieldings bonds is a bad sign for the economy.
That’s it for this edition. What would you like to hear about in our next Gist? Ask us a question here.
The AskFinny Team