Worries about the future returns in bonds have heightened the possibility investors will begin demanding higher yields. Daniel Kruger reports at The Wall Street Journal:
Recession worries and interest-rate cuts from the Fed have boosted bonds of all kinds this year. But worries that the gains can’t go on forever have led some investors to unusual corners of the market. Mr. Doty said he has added taxable bonds sold by states and local governments, which offer more attractive yields and stronger credit quality than most company debt or the tax-exempt bonds typically sold by municipalities.
Investors say they are also worried that a slowdown in global growth caused by rising trade tensions could lead to a contraction in corporate profits. Analysts expect earnings for companies in the S&P 500 to fall about 4% for the third quarter, according to FactSet data, in what would mark the biggest quarterly year-over-year drop since 2016.
Even with default rates well below historic averages, falling profits could push investors to demand higher yields on corporate bonds, eroding some of the recent gains. And some investors said the strength and duration of the rally make it hard to tell which bonds in what sectors of the economy will hold their value in a selloff.
“You can’t look at the market and say, ooh, this is a good value,” said Nancy Davis, chief investment officer at Quadratic Capital Management. Ms. Davis manages an exchange-traded fund, the Quadratic Interest Rate Volatility and Inflation Hedge ETF.
Read more here.