5 Safe Picks Amid Partial Inversion of Treasury Yield Curve
There seems no respite to the year-old, trade conflict between the United States and China. This has resulted in severe volatility, which has clearly taken Wall Street in its grip. On May 29, all three major stock indexes –- the Dow, the S&P 500 and the Nasdaq Composite –- tumbled 0.9%, 0.7% and 0.8%, respectively.
Equities are suffering as investors are flocking to safe-haven sovereign bonds. This shift in investment pattern has two consequences. First, – major stock indexes are on the verge of closing in the negative territory in May, for the first time since 2012, when the European debt crisis had occurred. Second, yield on U.S. Treasury bonds are gradually falling.
Partial Inversion of Treasury Yield Curve
Yields on several U.S. government bonds are witnessing a free fall since May 23. On that day, yield on the benchmark 10-year U.S. Treasury Note, long-term 30-year U.S. Treasury Note and short-term 2-year U.S. Treasury Note tumbled owing to stock market uncertainty and concerns about a prolonged trade war.
On May 28, yield on 10-year U.S. Treasury Note continued to fall, touching 2.264%, its 19-month low. Moreover, yields on long-term 30-year U.S. Treasury Note and short-term 2-year U.S. Treasury Note declined to 2.075% and 2.127%, respectively. However, yield on 3-month U.S. Treasury Note stayed at 2.356%, signifying partial inversion between 10-year and 3-month yield curves.
Further on May 29, yield on 10-year U.S. Treasury Note plunged to 2.21%, its lowest since September 2017, before settling at 2.26%. However, yield on 3-month U.S. Treasury Note stayed at 2.362%, resulting in a negative spread of a significant 10 basis points.
The yield curve (which measures interest at any given point of time for bonds of same quality but different maturity dates) of government bonds are generally upward sloping, implying that a higher rate of interest is needed for individuals to hold longer maturity bonds. However, an inverted yield curve is generally characterized as market’s diminishing expectations about future economic growth.
In fact, several economists consider inversion between the 3-month and 10-year bond yields as a clear indication of an upcoming recession. However, a more powerful indicator is the yield inversion between 2-year and 10-year U.S. Treasury Notes. Currently, the spread between these two government bonds is just about 15 basis points.
Yield on Government Bonds Fall Globally
Lingering trade conflict between the United States and China has already dented investors’ confidence internationally. Notably, European Union is the second largest trading partner for both United States and China.
Consequently, yield on 10-year Treasury bond Germany, Switzerland and Japan are currently in negative territory. Moreover, yields on 10-year Treasury bonds declined to less than 1% in France, Spain and the U.K.
5 Top Safe Picks
It will be prudent to invest in in low-beta and high-yielding stocks with a favorable Zacks Rank to keep one’s portfolio safe from day-to-day market fluctuations. The beta is equal to 1, which means that the stock is as volatile as the market. So, a stock is relatively more volatile if it has beta greater than 1 and less volatile if beta is less than 1. High dividend yield will provide a regular income stream to investors.
We narrowed down our search to five such stocks each carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. These stocks have moved higher year to date and still have upside left, which will help them to capture growth potential when the market recovers.
The chart below shows price performance of our five picks year to date.
Meridian Bancorp Inc. EBSB provides various financial products and services for individuals and businesses primarily in Suffolk, Norfolk, Middlesex and Essex Counties, Massachusetts. It has a beta of 0.53 and current dividend yield of 1.65%. The company has expected earnings growth of 18.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 5% over the last 60 days. The stock has surged 19.8% year to date.
PCTEL Inc. PCTI delivers performance critical telecom solutions in the Asia Pacific, Europe, the Middle East, Africa and the Americas. It has a beta of 0.21 and current dividend yield of 4.31%. The company has expected earnings growth of 675% for the current year. The Zacks Consensus Estimate for the current year has improved 187.5% over the last 60 days. The stock has surged 17.3% year to date.
OP Bancorp OPBK provides banking products and services in California. It offers demand, checking, savings, money market, and time deposit accounts and certificate of deposits. It has a beta of 0.78 and current dividend yield of 1.97%. The company has expected earnings growth of 10.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 15.3% over the last 60 days. The stock has soared 11.7% year to date.
Middlesex Water Co. MSEX owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated. It has a beta of 0.43 and current dividend yield of 1.59%. The company has expected earnings growth of 10.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.9% over the last 60 days. The stock has soared 11.2% year to date.
Southern Copper Corp. SCCO engages in mining, exploring, smelting, and refining copper and other minerals in Peru, Mexico, Argentina, Ecuador, and Chile. It has a beta of 0.70 and current dividend yield of 4.73%. The company has expected earnings growth of 21.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.5% over the last 60 days. The stock has climbed 11% year to date.
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Middlesex Water Company (MSEX) : Free Stock Analysis Report
PC-Tel, Inc. (PCTI) : Free Stock Analysis Report
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