Finance

Unusual activity in bonds is ahead, Wells Fargo predicts

Wells Fargo Securities’ Michael Schumacher sees year-end bond market volume dropping off earlier than usual.

According to the firm’s global head of rate strategy, the slide will likely occur around Thanksgiving instead of mid-December.

Not only is Wall Street still thinking about last year’s painful historic stock market drop, Schumacher blames the geopolitical backdrop. He contends it’s putting bond investors on edge.

“This week it’s Brexit. Probably Brexit again next week. Trade after that. Hong Kong. Iran. You could go on and on and on,” he told CNBC’s “Trading Nation‘ on Thursday. “These things are very tough for investors to assess.”

Schumacher said it has been a solid year for investors, so they are hesitant to push their luck with the S&P 500 up 20% so far.

“A lot of people, at least the ones I talk to, are saying it’s been a good year,” he said. “Why should I take a lot of risk around year-end when I can’t really get a grip on some of these things?”

Schumacher suggests it’s not such a bad strategy as the year draws to a close.

‘Dial it back a bit’

“Is it the wisest move to avoid risk? We’re not saying altogether. But dial it back a bit,” he said.

Schumacher recommends high-yield investments as a way to play the atypical backdrop and keep exposure to bonds. He’d also avoid long-duration bonds, particularly the 10-year Treasury due to uncertainty surrounding Brexit’s ultimate outcome.

“The best place to go is in fairly short duration credit,” he said. “Maybe not the very, very front end of the curve, but call it the three-year part out to the five- to seven-year area. Decent yield. Decent carry. Not a ton of downside.”

He also believes corporate debt is an area to consider.

“‘It’s interesting people like to point to corporate debt burdens being very high. Well, it’s true if you look at debt per say,” said Schumacher. “But corporates have been benefiting so much by virtue of Treasury yields being low that their actual interest coverage is still very, very good.”

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