While all of the focus has been on the equity markets, and the carnage that is being caused by the coronavirus, I take a different tack. I am not sitting around and wringing my hands and mumbling, “Woe is me.” Neither am I saying that “everything will be just fine and dandy, and at any moment,” because I do not believe that to be true. However, equities are not the only part of the markets and some real opportunities have presented themselves. If only you know where to look.
Let’s begin with the equity markets though.
S&P 500 -3.54%
HANG SENG -4.80%
*Data according to Bloomberg
Nothing pretty here. Pretty much ugly across the global board. Whether you consider airlines, gambling, shipping, cruise lines, the banking sector, or a variety of other industries. The outlook stands somewhere between “uncertain” and “bleak.” The supply chain in many industries, and commodities, is also coming into question. The stock markets, after a fabulous run in 2019, are under the hammer as a result of all of this, and the banging has commenced in earnest, with the S&P 500 down another 11.25 points early this morning, as I write my commentary.
The equity markets are melting! The Wicked Witch of the West has appeared on center stage.
So “where is this opportunity,” you may ask the Wizard, and “how do I play it?” Virtually no one in the media is discussing it at all. There has been no focus of any kind on the flip side here, and yet it sits there, staring you in the face. I am referring to the bond markets.
The 10 year Treasury stands at an all time low, for the past 50 years, at a 1.30% this morning. The 30 year Treasury is at 1.78%, while the 6 month Treasury Bill is at 1.39%. I have spoken, often enough, that this represents a “Borrower’s Paradise,” which is certainly true, but it also represents a great opportunity, which is to take profits, in selected bonds, and for a variety of reasons. Here is the data, as compared with equities, detailed above.
U.S. Treasuries +3.98%
U.S. Corporates +3.52%
U.S. High Yield +0.06%
U.S. Municipals +2.87%
*Data according to Bloomberg
While it is certainly true that risk assets in credit have widened to Treasuries during this process it is also true that yields, across the board, are around all-time lows. I suggest that you take advantage of this now because it could all disappear in a heartbeat, if the coronavirus situation somehow gets contained. Short of that, however, I expect yields to stay at current levels, or perhaps go even lower if the Fed steps in, once again, and lowers rates.
What I have been doing in the individual accounts that I handle is selectively selling some bonds at a “Profit” and raising cash, to take advantage of our current low interest rate environment. While the tech stocks and the equity highfliers are taking the brunt of the heat in equities, and the closed-end funds with double digit yields and monthly-payments that I favor have also seen a downdraft, it just presents an upcoming opportunity as prices are generally down, but yields are generally higher.
You should also look at your bond holdings and consider the duration risk, credit risk, and asset mix, at this point in the bond markets. Also bear in mind that almost all bonds mature at $100 so if you have some bonds that are now at significant premiums to $100, and have profits, this should also be taken into consideration.
The equity markets’ carnage is the bond markets’ good fortune and I would like to direct your attention to this opportunity today as the media reacts with shrieks and howls to the equity markets’ performance. All is not lost. You just have to open a different drawer.
“In the middle of every difficulty lies opportunity.”
– Albert Einstein
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.