Daily: Finding income opportunities amid higher yields

Key arguments

• The Treasury's announced buyback of up to USD 6bn of longer-dated debt was three times the originally scheduled amount but fell short of market expectations for a USD 7-8bn operation, failing to meet market expectations.
• Most Treasury buybacks this year have been concentrated in a relatively small set of less-liquid bonds, so questions remain over how effective the program will be in bringing down long-term yields.
• Yield volatility is likely to stay elevated around the ECB decision and the August US PPI and CPI releases ahead of the Fed's meeting next week.
• UBS expects the Fed to raise rates by 25bp on 16 September and another 25bp in December; this would narrow the relative advantage of short-duration bonds over cash, but bonds still have a place in portfolios.
• Investors should look beyond the shortest maturities for diversification, as longer bonds may ultimately benefit if Fed tightening reinforces confidence in its inflation commitment, reduces longer-term inflation expectations, or slows GDP growth.
• A diversified fixed income approach combining government and investment grade bonds with high yield, emerging market, and subordinated debt can broaden income opportunities in a risk-controlled way.
• Structured strategies such as reverse convertibles can provide income less correlated with traditional investments by monetizing market volatility, though investors must be willing and able to bear the unique risks of options.
• A multi-asset income portfolio spanning multiple asset classes and regions could offer another means of generating sustainable, recurring income throughout the business cycle.

Corresponding source evidence

1. US Treasury yields rose across maturities on Wednesday, as the Treasury’s announcement that it planned to buy back up to USD 6bn of longer-dated debt did not meet market expectations.
2. Given that the vast majority of the Treasury’s buybacks this year have been concentrated in a relatively small set of less-liquid bonds, questions remain over how effective the program will be in bringing down long-term yields. · this year
3. The European Central Bank is expected to raise interest rates by another 25 basis points today, while the US producer and consumer price indices for August are due today and tomorrow respectively before the Federal Reserve’s decision next week. · next week