Reaching For Yield? Be Aware Of What Lies Beneath...

Jeff unpacks what the markets are saying about a growth slowdown, and why investors should take a closer look at their bond allocations.
Three quarters into 2019, stock and bond performance seems to be telling a story of relative calm. Scratch the surface, however, and underlying market movements complicate the narrative. In particular, a trend toward quality suggests that investors are more concerned than they first appear.
Beneath the market calm… A focus on quality While volatility has only recently increased, the move to quality - in both stocks and bonds - has been occurring for some time, and is consistent with late-economic-cycle crowding by investors into "safer" assets. The metrics bear it out in the graph below.
The equity metric, shown in yellow, charts the relative performance of low-default-risk companies versus those with a high risk of default in the Russell 1000 Index. The upward sloping line shows how high-quality companies are outperforming their lower-quality counterparts.
The second metric, in orange, charts the difference in yield, or spread, between high-yield bonds in the Bloomberg Barclays US High Yield Index at two different risk levels: B-rated and, one notch down, CCC-rated. Once again, the upward sloping line indicates that slightly higher quality (and less risky) bonds are outperforming.

A tale of two impulses What's immediately apparent are the general performance similarities between bond and equity markets. The relative... Read more