“For the time being the Fed is doing a good job with its forward guidance but if the economy cranks up, they will look foolish saying rates will stay low for longer,” says Michael Kastner, managing principal at Halyard Asset Management. “No matter what the Fed may say, the market will price in a closer start date for rate hikes if the data warrants that reaction.”
Michael Kastner, managing principal at Halyard Asset Management, plays down the likelihood of a taper decision next week but adds: “The Fed has been so wishy-washy about the taper this year, you can’t rule out a December taper.”
“The current rally has robbed a bit of next year’s performance,” says Michael Kastner, managing principal at Halyard Asset Management.
Mr Kastner says: “We seem to have moved from investing under sensible valuations to one of the greater fool theory, hoping there is another buyer willing to pay a higher price at these extended levels.”
“When I consider buying a bond, it is important to have some degree of comfort the issuing entity will pay some of my money back even if it goes into default,” said Michael Kastner, a principal at Halyard Asset Management. “The coco structure defeats that purpose.”
Such criticism has not deterred banks as demand has been buoyed recently by yield-hungry investors and global investors who can snap up cocos with borrowed money, bolstering their returns.
“There are always investors out there willing to turn a blind eye to weaker credit quality or higher risk in order to capture more yield,” said Mr Kastner.
“This is a critical period of the year for the economy and the last thing you want to see is business and consumers retrenching spending,” said Michael Kastner, principal at Halyard Asset Management. “As we have seen in the past, equities can take quite a hit when Washington’s battles turn ugly.”
“Given the size of this deal and in order to attract a large pool of investors, concession may have to be such so that these bonds have to become profitable pretty soon,” said Michael Kastner, principal at Halyard Asset Management.
“Verizon will be an enormous deal and has the potential to destabilise the market or be the catalyst for a rebound in corporate bond sentiment,” says Michael Kastner, principal at Halyard Asset Management.
Michael Kastner, principal at Halyard Asset Management says there is a risk that bond yields rise further as economic growth for the second quarter and the July jobs number is revised upwards.
“It looks like the economy has underlying strength and as an investor you have to respect the bond selling we saw in May and June when the taper was introduced by the Fed.”
Mr. Kastner says caution over Treasuries is warranted, in spite of much higher yields since May.
“Buying the 30-year around 3.75 per cent may appeal to some investors, but there is a risk that its yield rises to 4 per cent and that’s a meaningful hit to a portfolio.”
Michael Kastner, managing principal at Halyard Asset Management, says he is hedging the duration risk in his portfolios from owning longer-dated corporate bonds with interest rate futures.
“We are adding exposure across all sectors and see investment grade clawing back some ground on junk,” he says.
“No one wants to own Tips and the lack of Fed talk as yields have risen suggests they are letting the market feel its way,” said Michael Kastner, managing principal at Halyard Asset Management.