The Weekly Report pretty much covers the big issue of the week. Will Central Banks and governments do something to help the market? It is pretty much a foregone conclusion that they won’t do anything that really helps the economies, but there is hope that they will help the markets.
Growth has become the new mantra, but that ignores that it was the old mantra, and is what caused the problems in the first place. So far, it looks like the excitement is fading and people are starting to question how easy it will be for governments to instill growth when they have failed at that in the past. Without some new policy from the ECB, I expect the “growth is easy” rally to come to an end. I’m watching it closely, because the word growth does get the equity markets blood boiling, but it isn’t so exciting to credit markets. Bond investors care about getting repaid and a path that creates more debt that is unlikely to be serviced by the “growth” it creates is not good for bondholders. The more the inevitable path looks like default/restructuring or changes in currencies, the less likely new bondholders step up.
Main, which was 2 tighter at one point today, is now 2 bps wider. Stocks are leaking a little ahead of the data, and we do have a big day of data. Personally, I think the rally on bad news phase is over. So we better get some good news on the data front, or that too will weigh on stocks.
I have a dilemma. I like high yield bonds as an asset class right now, and have found the ETF’s a decent way to play it, but right now, they are trading too rich, and I think that as the market has diverged into three distinct bond classes:
- high quality, low yield, long duration bonds
- high coupon, low yielding, high spread, awful convexity bonds
- and story credit bonds
So with a bifurcated market, at very low yields, careful bond/credit selection will trump beta, and access to new issues will augment bond/credit selection, so finding a manager to deliver those should be a priority over just getting exposure to the market – which is what the ETF’s are good at offering. Alpha is not their strength.