Merrill: How to Play the Bond Market

Posted by

Merrill Lynch Wealth Management is out with their new monthly CIO Report in which they make a some recommendations on how we should be thinking about the bond market.

The bottom line seems to be that Merrill analysts think there will be plenty of time to pick up on a rise in rates given the Fed’s extraordinary new precedent of explicit targeting guidance.  There are no signs in any near-term maturities that anyone believes this is about to happen out of the blue.

In addition, the strategists note that the Fed’s exit will not be a singular event – rather, it will actually occur in four steps:

We think the broad outline of the Fed’s plan to reduce its influence in the capital markets has the following elements, in order:

1. Slow down of asset purchases
2. Slow down and then stop reinvestments
3. Raise short-term rates
4. Begin sell down of asset portfolios

Merrill doesn’t see this process even beginning for at least the next 12-18 months, let alone cycling through all four steps.

They caution that some of the more speculative areas within fixed income (EM, HY) are now showing signs of apparent froth (see chart below) – but given the “anchoring” taking place, this need not lead to calamity.

bond flows

Lastly, some advice about where and how to be taking risk in the bond market given these realities:

Where are the opportunities in the fourth quarter of this great Fed policy game? In our view, it is still worth taking some bond market risk in U.S. high yield, including senior (unrated) floating rate bonds, Emerging markets local debt, and recently added to our list, convertible bonds. The combination of negative real yields in high quality bonds, yet on average reasonably healthy corporate fundamentals, support taking credit risk over interest rate risk. We do not see credit metrics flashing red yet and as long as corporations are maximizing their profit margins, we are comfortable that the extra risk in higher yielding bonds has the potential to be rewarded. We remain on the lookout for any signs of weakness in corporate balance sheets and while the rate of improvements has slowed, overall non- financial balance sheets remain healthy.

With defaults low, balance sheets healthy and rates going nowhere anytime soon, this playbook grows ever more popular.

Source:

Merrill Lynch Wealth Management

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  2. click here commented on Sep 21

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/04/08/merrill-how-to-play-the-bond-market/ […]

  3. https://blazingtraderapp.com commented on Oct 04

    … [Trackback]

    […] Find More to that Topic: thereformedbroker.com/2013/04/08/merrill-how-to-play-the-bond-market/ […]

  4. buy 7lab pharma commented on Oct 08

    … [Trackback]

    […] Read More Info here to that Topic: thereformedbroker.com/2013/04/08/merrill-how-to-play-the-bond-market/ […]

  5. 홀덤사이트 commented on Oct 16

    … [Trackback]

    […] Info on that Topic: thereformedbroker.com/2013/04/08/merrill-how-to-play-the-bond-market/ […]

  6. Best Text to Speech Online commented on Dec 07

    … [Trackback]

    […] Here you will find 47887 additional Info to that Topic: thereformedbroker.com/2013/04/08/merrill-how-to-play-the-bond-market/ […]

  7. Hydrocodone for sale commented on Dec 10

    … [Trackback]

    […] Find More here to that Topic: thereformedbroker.com/2013/04/08/merrill-how-to-play-the-bond-market/ […]

HowIInvestMyMoney