Corporate Bonds – Harlyn Research LLP

Something Is Going to Break

Friday, May 13th, 2022

Volatility has entered the danger zone.

Realised volatility continues to march higher every week and we have now got to the danger zone, where this creates the conditions for more volatility – especially if the FOMC is committed to much tighter monetary policy. In these circumstances, traditional valuation metrics lose a lot of their power and investors should assume that markets in one or more major asset classes will become disorderly. We think this has already begun in Nasdaq, Italian government bonds and the Chinese yuan. Other assets, which may follow in due course, include US High Yield, credit ETF’s and US housing.

Filed under: Categories: Corporate Bonds, Market dislocation, Market Timing, Real Estate, Real Yield, Volatility

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Should We Be Worried?

Friday, February 18th, 2022

Investors need to price the risk of recession in 2023

A recession in 2023 is not our central case, but investors ought to price the risk of it happening, in order to reduce the probability that it will. We would be surprised if the Federal Reserve were to raise rates seven times in 2022, mainly because that would automatically cause the consensus to reduce its forecasts for US growth in 2023. The Fed’s hawkishness in 2016 had a similar effect and we see early signs of this happening in two of our main models. Investment Grade has hit a five-year low in our US$ fixed income model. Investors are now concerned about credit quality for the first time in years. Industrials have just been downgraded to underweight in our US equity sector model, which nearly always indicates that investors are worried about the outlook for the real economy.

Filed under: Categories: Corporate Bonds, Equities, Real Economy

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Income in Dollars, Please

Friday, April 17th, 2020

Time to look at European Energy equities

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.

Filed under: Categories: Corporate Bonds, Dividends, Energy Prices, Eurozone Crisis, FX rates, Government Bonds, Tail Risk

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Is Energy Un-Investable?

Thursday, November 7th, 2019

Sector at multi-year lows in equity and fixed income models

Nobody likes the Energy sector. On a global basis the current sell-off is as bad as all the other major declines, apart from 2014. The difference is that oil prices are much more stable now than they were then. The medium-term challenges (ESG agenda, electric cars, balance sheet distress) are all well-known, but we would be really surprised if the sector wasn’t rated overweight again within the next two years – any maybe sooner.

Filed under: Categories: Corporate Bonds, Energy Prices, Equities, Sector Strategy

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Credit Wobble

Thursday, May 30th, 2019

High Yield weakness is not caused by the Energy sector

High Yield has peaked in our fixed income models and has fallen sharply against Investment Grade. We have checked our cross-asset sector models and it isn’t caused by a problem in Energy. It looks like a straightforward loss of confidence in the outlook for Industrial High Yield. This is potentially ominous for Equities as well, but we haven’t generated a sell signal just yet.

Filed under: Categories: Corporate Bonds, Energy Prices, United States

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Straws in the Wind

Wednesday, November 21st, 2018

A time for observation not forecasts

Forecasting with precision all the components of a bear market is very difficult. Observing the increasing number of signals which point in that direction is much easier. These range from US high yield to Eurozone government bonds and US and European equity strategy. It’s not all bad news. There are some positives, such as the potential for a surprise in UK Equities, and a message to buy duration in US Treasuries. However, the overall message from these straws in the wind is very powerful.

Filed under: Categories: Corporate Bonds, Equities, Eurozone, Government Bonds, United Kingdom

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Simple Explanation

Thursday, November 15th, 2018

Industrials are weak in both equity and credit models

Weakness in US Industrials can often be a signal that we are close to a period of market disruption. That signal is flashing yellow, as are the signals from other equity regions such as the UK, the Eurozone and Japan. We have red flags on Industrials across all of our credit models. We don’t have a clear and obvious cause yet, but the simplest explanation could be that we are closer to a significant slowdown than consensus thinks.

Filed under: Categories: Corporate Bonds, Industrials, Market dislocation, Sector Strategy, United States

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Three Unrelated Ideas

Saturday, July 14th, 2018

Japanese Equities, US High Yield and Healthcare

Our models suggest that investors have decided to use Japanese rather than Eurozone Equities, as a way of funding their increased exposure to US Equities. US High Yield may be about to lose its #1 position in fixed income. Healthcare is about to be upgraded to overweight in the US and Europe. It is largely unaffected by the threat of a trade-war.

Filed under: Categories: Corporate Bonds, Global Equities, Healthcare, Sector Strategy

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Some Relief at Last

Wednesday, June 13th, 2018

US Treasuries may bounce in Q3

The risk-adjusted returns of all parts of the US Treasury curve are set to improve over the summer. Our models suggest that investors may be revising down their estimates of the size and scope of future rate hikes from the Fed as evidence mounts of a slowdown in Emerging Markets. This would be consistent with a further flattening of the yield curve and less pressure on spreads in Investment Grade. High Yield already offers the best risk-adjusted returns in US credit. The wild card remains EM Sovereigns; contagion is a real risk, and credit quality may not be an adequate defence.

Filed under: Categories: Corporate Bonds, Government Bonds, Yield curve

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If You Have to Own Bonds…

Wednesday, January 24th, 2018

This is how to trade them

All our tactical asset allocation models are close to maximum underweight in fixed income. If you have to have some exposure, our models are clear that the best overall strategy is momentum with a bias towards risk-aversion. Other strategies tend to lead to lower returns and larger drawdowns over the long term.

Filed under: Categories: Corporate Bonds, Government Bonds, Momentum vs mean reversion

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