Andrew Osterland is a business writer, specializing in personal finance and taxes.
Andrew Osterland is a business writer, specializing in personal finance and taxes.
For most of the last 10 years, fixed-income investors have not had to worry about liquidity. But as volatility has surged, first in stocks and now in credit markets, liquidity is starting to dry up across segments of the corporate bond markets.
Keeping asset values high and preserving the wealth effect that has fueled consumer and corporate spending is crucial to the health of the economy.
Last year, investors in local currency emerging market debt benefited as the MSCI EM currency index rose 3.5 percent against the dollar. This year, it's reversed and with a risk-off mentality in global markets, local currency returns are negative.
The fall months are typically weak for muni bonds, and although this year has generally bucked seasonal trends, it looks that way again this year.
Both high-yield bonds and leveraged loans are priced to near perfection, with credit spreads still hovering at historic lows. They are a bet on the U.S. economy and that it will be another year or two before the cycle turns.
Other than emerging market bonds, U.S. investment-grade debt — once a safe haven for investors — has had the worst performance of any major sector of the fixed-income landscape so far this year.
The financial profiles of emerging markets are far better than they were just five years ago, but when global investors get worried about risk, emerging market assets are among the first things they sell.
As the gap between short- and long-term interest rates continues to shrink, equity investors are shrugging off the bearish signal from the bond market.
An inversion of the yield curve — when long-term rates fall below short-term — traditionally indicates a looming recession. The newly appointed Fed Chairman is already facing criticism for increasing that risk.
For investors worried about the risk of a concentrated stock position, options can reduce their exposure in a tax-efficient way.
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