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Last week painted a mixed picture for the fixed income market, with high yields and international inflation protected bonds again claiming the top two spots in our trend table. Long term government bonds and munis lagged the broader market. We think two major themes—durational risks of long term government bonds, inflation pressures in emerging markets—are in focus and would offer investors insights on how to navigate the bond market.

  • Funds negatively exposed to durational risk have suffered in recent weeks. The 20+ Year Treasury Bond fund (TLT) has been hit hard, suffering an 8% drop in the past three months. Low short-term interest rates have prompted investors to seek for higher returns at the long end of the yield curve and pile cash into longer term bonds. In fact, long term government bonds should not be viewed a safe haven to park one’s money. The U.S. government is nowhere near to lowering or even leveling the trillion dollar deficits. It’s only a matter of time before we see much higher interest rates and as a result, the dollar will remain under long-term pressure. Therefore, much caution should be paid to investing in long term government bonds. Principal losses are likely should rate hikes.
  • Inflation fears in the emerging markets (e.g. China, Latin America) have spurred speculations of rate hikes. Inflationary pressures in these regions would central banks to raise interest rates. International Inflation Protected Bond (WIP) gained the second spot last week.

Funds composed of well-picked companies with strong credit profiles and earrings potential should perform well. On a risk-adjusted basis, the High Yield Bond Fund (JNK) deserves some attention from investors.

With the U.S. dollar under long term pressure, ongoing inflation in emerging markets and parts of developed markets, International Inflation Protected Bonds (WIP) serves as a double hedge against a potential drop in dollar value and inflationary pressures at the moment.
For a more detailed performance evaluation, refer here.

Assets Class

Symbols

01/14
Trend
Score

01/07
Trend
Score

Direction

High Yield

JNK

4.56%

4.08%

^

International Inflation Protected

WIP

2.99%

1.48%

^

Long Term Credit

LQD

1.5%

1.61%

v

International Treasury

BWX

1.11%

-0.96%

^

Emerging Mkt Bonds

PCY

1.1%

1.44%

v

Intermediate Term Credit

CIU

1.04%

0.99%

^

Inflation Protected

TIP

0.89%

1.02%

v

Short Term Credit

CSJ

0.42%

0.59%

v

Short Term Treasury

SHY

0.28%

0.34%

v

Intermediate Treasury

IEF

0.14%

0.43%

v

Treasury Bills

SHV

0.0%

0.03%

v

US Total Bond

BND

-0.03%

-0.07%

^

10-20Year Treasury

TLH

-0.68%

-0.64%

v

MBS Bond

MBB

-1.01%

-0.89%

v

20+ Year Treasury

TLT

-2.78%

-2.59%

v

New York Muni

NYF

-3.11%

-2.49%

v

National Muni

MUB

-5.54%

-2.38%

v

California Muni

CMF

-7.39%

-3.76%

v


The trend score is based on the following formula: for an ETF or index, we use the average of 1, 4, 13, 26 and 52 week total returns (i.e. dividend and distribution reinvested). We then rank them based on the scores to derive the following trend table. Notice the average of the total returns would overweight the recent price movement. This is similar to exponential moving average.


click to enlarge

Source: Current Durational and Inflation Risks for Bond ETFs