P2JW032000-4-B01500-1--------XA
THE WALL STREET JOURNAL.
Wednesday, February 1, 2017 | B15
* * * *
MARKETS
As Yields Increase, Bonds
Regain Allure as a Hedge
The recent bond selloff has
brought back one of the main
reasons for investors to hold
them: as an insurance policy.
Sovereign-bond
yields
across the developed world
tumbled to all-time lows last
year as prices soared, diminishing their appeal to some investors. Now, with government bonds offering higher
returns, some money managers are starting to buy Treasurys and other high-grade
debt again as a hedge against
market turbulence.
This nascent source of demand could help set a floor on
prices for U.S. Treasurys—the
haven asset of choice for many
investors—following a rocky period for the $13 trillion market,
as well as for German bunds.
The yield on the 10-year
Treasury note is up more than
a percentage point from last
July’s low but is little changed
over the past month.
Investors have paused in recent weeks to gauge how much
President Donald Trump’s policies will boost economic
growth and inflation, increases
in which are broadly good for
stocks and bad for bonds. For
years now, investors have
liked bonds because their
prices kept rising, rather than
for their hedging properties.
But as yields rise again,
those old insurance seekers
may start to return.
They include Paul O’Connor,
who has started to rebuild positions in government bonds
in 2017 after several years of
largely avoiding using these
securities as “shock absorbers” in the cross-asset portfolios he runs. “We can now expect that government bonds
can offer some kind of insurance feature again,” said Mr.
O’Connor, who heads multiasset investments at Henderson
Dollar
Falls on
Weak Data
BY CHELSEY DULANEY
The U.S. dollar slid to its
lowest level since November
on Tuesday amid weak U.S.
data and new indications
that the Trump administration would prefer a weaker
dollar.
The Wall Street Journal
Dollar Index,
CURRENCIES which measures
the
U.S. currency
against a basket of 16 others,
fell 0.7% to 90.48, its lowest
closing level since mid-November.
The dollar had rallied to a
14-year-high after President
Donald Trump’s election in
November. But the U.S. currency has lost steam since
the start of the year, falling
nearly 3% in January, as investors assess the impact of
Mr. Trump’s protectionist
trade and immigration policies.
Comments from key administration officials indicating that the U.S. would prefer a weaker currency also
buffeted the dollar.
Mr. Trump suggested
Tuesday that Japan and
China are devaluing their
currencies.
“Every other country lives
on devaluation,” Mr. Trump
said at a meeting with pharmaceutical executives. “They
play the devaluation market
and we sit there like a bunch
of dummies.”
Separately, a U.S. trade
adviser told the Financial
Times that Germany is using
a “grossly undervalued” euro
to gain an advantage over
trading partners, including
the U.S. German Chancellor
Angela Merkel denied the
claims in a press conference.
A weaker currency helps
countries by making their exports more competitive
abroad.
CHUCK MYERS/TNS/ZUMA PRESS
BY JON SINDREU
AND CHRISTOPHER WHITTALL
meaty returns, while highgrade debt would act as a buffer—rising in value when fears
were high and stock prices fell.
But investors became more
wary of relying on bonds as a
safety valve in portfolios as
yields plumbed new depths,
dragged down—even below
zero—by loose central-bank
policy in Europe and Japan.
At the peak in late September, there was $13.34 trillion
of negative-yielding debt globally, according to Bank of
America Merrill Lynch. Investors didn’t have to pay to hold
Treasurys, but yields became
increasingly slender. The 10Shifting Sands
year note hit a record-low
Some investors believe fixed income could retake its role as an
yield of 1.366% in July.
insurance policy against periods of market pessimism.
Because equities also get a
Bond prices have slipped while U.S. stock indexes this year have
boost from loose monetary
roared to fresh records...
policy, stocks and bonds actuChange in prices since 2014
ally started moving almost in
lockstep with each other.
15%
Government debt became
10
not only a poor hedge in reStocks (S&P 500)
cent years, some investors say,
5
but also an asymmetric bet.
0
Yields looked like they had little room to fall further—leav–5
ing investors vulnerable to a
–10
Bonds (10-year Treasurys) reversal in the market.
–15
This is what happened in
2015
’16
’17 September: Money managers
started doubting that central
...and fewer bonds are trading at negative yields, which imply
banks would go much further,
a subzero return to a buyer at par.
driving Treasury and German
Share of the $43 trillion global bond market yielding a return below zero
bund yields to slowly ratchet
higher. The election of Mr.
30%
Trump on Nov. 8 sparked a
further selloff in bonds, joined
by a rally in stocks across de20
veloped nations.
Now, U.S. bonds and stocks
10
are moving in opposite directions again, according to an
analysis of market correlations
0
by The Wall Street Journal. In
Europe, a smaller share of bonds
’15
’16
’17
is offering negative returns.
Sources: Thomson Reuters (prices),
With bond yields higher, NiBank of America Merrill Lynch (global bonds)
THE WALL STREET JOURNAL.
colò Carpaneda has been inGlobal Investors, which over- sen, chief economist at Indos- creasing holdings of short-term
sees roughly £100 billion ($125 uez Wealth Management. government bonds in Europe,
billion) world-wide. This could When yields rose in December, as well as U.S. corporate debt.
limit any losses for sovereign Indosuez was one of the firms
“Much of the Trump rally is
bonds, which have moved that increased its exposure to already priced in; this way we
sideways over the past month. sovereign debt.
can protect ourselves against
If 10-year Treasury yields
Traditionally, the classic as- any negative events,” said Mr.
go above 2.75% in the medium set-allocation structure was to Carpaneda, investment directerm, from 2.451% on Tuesday, invest 60% of a portfolio in eq- tor of the retail fixed-interest
they will lure many more buy- uities and 40% in bonds. Equi- team at M&G Investments, a
ers, said Marie Owens Thom- ties were supposed to deliver £248 billion money manager.
BY MIN ZENG
U.S. government bonds
strengthened Tuesday as disappointing reports on business activity and consumer
confidence stoked demand for
haven assets.
The yield on the benchmark
10-year Treasury note settled
at 2.451%, compared with
2.486% Monday. Yields fall as
bond prices rise.
The
Federal
Reserve
started its two-day policy
meeting Tuesday and is
scheduled to release a policy
statement Wednesday afternoon. The U.S. central bank is
widely expected to stand pat
after raising short-term interest rates in December for the
second time since 2006.
111.8
Consumer-confidence index
reading for this month
The Chicago Business Barometer fell to 50.3 in January
from 53.9 in December. In addition, the U.S. Conference
Board’s consumer-confidence
index declined to 111.8 in January from 113.3 in December.
The data are “a bit of a
pushback against the optimism
that sent stocks soaring to records and Treasury yields
climbing” since the U.S. election, said Larry Milstein, head
of government and agency
trading at R.W. Pressprich & Co.
Both U.S. stocks and the
dollar fell Tuesday, the latest
signs that the reflation trade
since the U.S. election is pulling back. The Dow Jones Industrial Average has been
weakening after rising above
20000 last week for the first
time. The dollar has been falling after reaching its highest
since 2002 in early January.
Investors are weighing the
prospect of expansive fiscal
stimulus and Mr. Trump’s protectionism. His executive order suspending immigration
from seven countries added to
the uncertainty.
“There is still a lot of uncertainty,” which is likely to
continue to generate fluctuations in the bond market in
the near term, said Praveen
Korapaty, head of interestrate strategy at Credit Suisse.
Selling Treasury bonds had
been the popular trade for investors to bet that the prospect of large fiscal spending,
lower taxes and lighter regulation would lead to stronger
economic growth.
Demand for Treasury securities also had diminished as
investors expect the policies
to generate higher inflation,
potentially allowing the Fed to
quicken its pace of interestrate increases.
The 10-year Treasury yield
reached a two-year high of
2.6% in mid-December from
1.867% on Election Day in November. The yield has been
fluctuating largely between
2.3% and 2.6% over the past
weeks. The yield was only
marginally above 2.446%
traded at the end of 2016.
Hedge funds accumulated
$14.7 billion of net bets wagering on lower prices for the
10-year Treasury futures for
the week that ended Jan. 24,
according to TD Securities. On
the other hand, asset managers held a net $10.2 billion in
wagers on higher prices of the
10-year Treasury futures during the same period.
Tom Anderson, chief investment officer at Boston
Private Wealth, said the prospect of fiscal stimulus is likely
to boost the economy and
push up bond yields, though
he doesn’t expect a swift rise.
AUCTION RESULTS
Here are the results of Tuesday's Treasury auctions.
All bids are awarded at a single price at the marketclearing yield. Rates are determined by the difference
between that price and the face value.
FOUR-WEEK BILLS
$155,418,623,500
Applications
$45,000,618,500
Accepted bids
$397,952,500
" noncompetitively
$100,000,000
" foreign noncompetitively
99.961889
Auction price (rate)
(0.490%)
0.497%
Coupon equivalent
21.37%
Bids at clearing yield accepted
912796JE0
Cusip number
The bills, dated Feb. 2, 2017, mature on March 2, 2017.
52-WEEK BILLS
Applications
Accepted bids
" noncompetitively
" foreign noncompetitively
Auction price (rate)
Coupon equivalent
Bids at clearing yield accepted
Cusip number
$69,608,405,400
$20,000,281,400
$233,300,400
$0
99.181000
(0.810%)
0.826%
42.20%
912796LJ6
The bills, dated Feb. 2, 2017, mature on Feb. 1, 2018.
EQUITIES
Stocks Sound Retreat Amid Poor Earnings
BY AKANE OTANI AND RIVA GOLD
The Dow Jones Industrial
Average fell again, as earnings
results hurt the shares of some
big companies.
The stock-market rally that
catapulted the Dow industrials
over 20000 last week has
stalled in recent sessions, with
investors backing away from
shares of financial and industrial companies and picking up
havens such as gold.
Some investors and analysts
said discord over President
Donald Trump’s move to restrict immigration has tempered risk appetite at the end
of an otherwise strong month
for stocks.
The blue-chip index fell
107.04 points, or 0.5%, to
19864.09, on Tuesday, ending
lower for a third consecutive
session. The S&P 500 lost 2.03
points, or 0.1%, to 2278.87,
while the Nasdaq Composite
gained 1.07 points, or less than
0.1%, to 5614.79. Major indexes
posted their biggest declines
of the year on Monday.
Despite this week’s setbacks, major indexes ended the
Retreat From Risk
Shares of industrial companies
gave back some of their
postelection gains, while utilities
rallied alongside other havens.
S&P 500 utilities sector
2%
1
S&P 500
0
JOHN SOMMERS II/REUTERS
Seeking insurance
against turbulence
could help set a floor
on prices of Treasurys
Treasurys Heartened
By Signs of Weakness
–1
–2
S&P 500 industrials sector
9:30 10
11 noon 1
2
3
4
Source: FactSet
UPS gave a downbeat outlook for 2017 earnings. Shares fell 6.8%.
THE WALL STREET JOURNAL.
month higher in what was
their first January gains since
2013.
The Dow industrials added
0.5% for the month, the S&P 500
rose 1.8% and the Nasdaq Composite climbed 4.3%, with all
three indexes posting their third
consecutive month of advances.
Banks gave back some of
slipped 0.6% Tuesday, notching
a 0.4% decline for January.
“Everyone’s trying to figure
out if Trump is going to be
successful in reigniting the
economy,” said John Bartlett,
portfolio manager at Reaves
Asset Management.
Corporate earnings also
tripped up stocks.
their postelection gains in January. Dow component Goldman Sachs Group fell $4.58,
or 2%, to $229.32, on Tuesday,
posting a 4.2% decline for the
month.
The KBW Nasdaq Bank Index of large U.S. commercial
lenders, which rallied 22%
from Election Day to year-end,
Dow component Exxon
Mobil fell 97 cents, or 1.1%, to
83.89, after the company reported lower fourth-quarter
earnings and said its 2016
profit came in at its lowest in
20 years.
United Parcel Service shed
7.90, or 6.8%, to 109.13, after
the company gave a downbeat
outlook for its 2017 earnings
and said lower margins in ecommerce deliveries hurt its
bottom line.
Industrial companies in the
S&P 500 fell 0.9% and were
among the worst performers
in the broad index.
Under Armour fell 7.45, or
26%, to 21.49, after the athletic-gear maker posted an unexpected fall in quarterly
profit and issued a disappointing sales forecast for 2017.
Havens gained. Utilities
companies were the best performers in the S&P 500 on
Tuesday, rising 1.6%.
Early Wednesday, Japan’s
Nikkei was flat, while Hong
Kong’s Hang Seng Index was
down 0.9%, South Korea’s Kospi was up 0.5% and Australia’s
S&P ASX 200 was up 0.3%.
AHEAD OF THE TAPE | Steven Russolillo
Facebook’s Steep Wager on Online Video Has to Pay Off
First it was
desktop. Then
it was mobile.
Next up on
Facebook
Inc.’s quest
for world domination: video.
Strong advertising
growth, with a vast majority
of it driven by mobile, has
propelled the social network
to become the sixth-biggest
U.S. corporation by market
value.
But even Facebook acknowledges that it won’t be
able to maintain its current
trajectory without clogging
people’s news feeds with too
many ads.
Now it is betting on video,
with the aim of swiping television ad dollars to keep up
growth.
With Facebook due to release fourth-quarter earnings on Wednesday, investors should watch this space.
Any stumble won’t be well
received, particularly with
shares nearly priced for perfection.
Analysts polled by FactSet
estimate earnings of $1.31 a
share, up 65% from a year
ago. Revenue is expected to
have increased 46% from the
prior year.
Facebook acknowledges
that heady growth won’t last
forever. It has warned that it
will stop showing users more
ads in their news feed, which
it says will prompt advertising growth to “come down
meaningfully” later this year.
That puts the onus on its
video endeavors, including
Facebook Live. Chief Executive Mark Zuckerberg has
said he envisions the social
network morphing into a
“video-first” company. The
Wall Street Journal reported
this week that Facebook is
developing an app for television set-top boxes, which
would include Apple Inc.’s
Apple TV.
With that in mind, the
company already is making
adjustments to attract ad
money from TV advertisers.
In an update published last
week, Facebook said it would
tweak its news feed to favor
longer videos and, in particular, videos that people are
watching closer to the end.
Uncertainty about
whether they can attract
those ads is one of the big-
gest risks facing the stock
price. Some content owners
have resisted making deals
due to concerns about advertising arrangements.
The highflying stock has
had more tempered moves of
late. Shares rose 10% last
year, the smallest calendaryear gain in Facebook’s short
history as a public company.
Fetching 24 times projected
earnings over the next 12
months, Facebook is pricier
than rivals Microsoft Corp.,
Alphabet Inc. and Apple.
There is still a lot to like,
but not at this price.