Thursday, June 6, 2013

"Bond Substitutes" Have Fallen Victim to the Now "Usual Suspect" (Fed Tapering)

We mentioned in yesterday's post that concerns about Fed tapering of the QE program have trampled on fixed income securities, crushing prices and sending yields to recent historic highs!  That, in turn, has created fear in the equity markets that higher rates and a Fed who's about to take its foot off of the accelerator would combine to present severe headwinds for corporate earnings and stock prices. For some perspective, have a look at the chart and embedded notes below showing the ETF for intermediate/longer term investment grade corporate bonds.....


The damage, however, was particularly acute in a sector that was the fair-haired child of the market for most of this ytd, enamored both by equity and fixed income portfolio managers alike especially due to their chunky dividends, namely, Utilities.  Given their generally defensive nature relative to broader market movements, the high 'yields' of Utility stocks were perceived to be reasonably safe substitutes for bonds even in bond mutual fund portfolios!  And all was good....until it wasn't!

Have a look at the chart below for what could appear in the dictionary in explaining the meaning of the phrase: "bursting a bubble".

Tomorrow's NFP data will probably help set the overall market direction and clarify just how imminent a Fed tapering is likely to be.  But unless the number changes the US economic growth paradigm of 2ish% growth, one might wonder how low in price the XLU will go before still-yield-hungry investors clamor once again for what is now a close to 4% dividend yield.

Worth watching.....

(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs including XLU. Positions may change at any time without notice.

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