Thursday, April 10, 2014

Emerging Market Debt Options to Hedge Fed Taper and Stock Volatility

Managing money in the current financial market is beginning to resemble the game of musical chairs I played years ago in grade school.  Last year, at virtually the same moment in the year, the market “forces” decided that the music would stop and the debt market, primarily the longer duration bond market as well as high dividend paying stocks such as utilities (VPU), telecom (VZ) (T) and REITs (VNQ), would not have a seat at the table.  Municipal bonds (MUB) last summer were also ostracized from the game, with the fears of bankruptcies in Detroit and Puerto Rico looming large and investors warned to stay away as the market was far too risky for entry.

The T-Bond (TLT) (TLH) (IEF) route moved the 10 year from around 2% in early 2013 to a high touching 3% precisely at year end.  The longer duration securities such as the 30 year also traded down in value, up in yield in 2013, about 90 basis points to end the year at almost 4%.  All the related interest-sensitive markets were beaten into submission going into year end.  Opportunities for savvy income investors were plentiful – for a brief moment.

Market Dancing to a Different Tune in 2014

Since the beginning of 2014, however, the music has been noticeably different.



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