Short term bond yields turn negative

Kathy Jones, Schwab Chief Fixed Income Strategist, joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to break down how the bond markets are weathering the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOFOROUS: We want to talk bond markets now, and for that we're going to bring in Kathy Jones. She is Charles Schwab's Chief Fixed Income Strategist. Kathy, it is good to see you, as always. I like the piano behind you. I hope you're getting a chance to play it every now and again since we're now at home.

KATHY JONES: If the markets settle down, I'll get a chance to practice, but--

ALEXIS CHRISTOFOROUS: All right, sounds good. Let's talk about all the turmoil we've been seeing in the bond market. I mean, the Federal Reserve has taken unprecedented steps here to push liquidity into this market to prevent a credit crunch. Is it working, and do we need more?

KATHY JONES: It is working. I mean, we've seen volatility come down quite significantly. The Treasury market is stabilizing, and the credit markets tend to be a lot calmer right now than they were before. So it's working.

There's still some pockets that we're concerned about. We're worried about the mortgage market, mortgage-backed-securities market where there tends to be quite a bit of leverage. That's still a worry. And emerging-market bonds still not looking really good here. Most emerging-market bonds are under a lot of stress. And, of course, then we have the high-yield market which has rebounded somewhat but still is an area we're worried about.

BRIAN SOZZI: Kathy, what-- Brian here. What could happen in the commercial-mortgage-backed market? We're hearing a lot of companies-- retailers, restaurants, even offices-- not being able to pay their rents. Could April be pretty ugly?

KATHY JONES: It potentially could be. Now I think there's room here for the Fed to try to step in and help out, but some of these REITs are heavily leveraged. They're reasonably leverage. They need to pay out what they bring in. And we know that they're starting to get some mortgage-- I'm sorry, some margin calls. So it's an area where we could see some stress in the bond market, and it's something we're keeping a pretty close eye on.

ALEXIS CHRISTOFOROUS: Kathy, what about pockets of opportunity right now? Where might investors find them in the bond market? I mean, are muni bonds the way to go? Are some of the higher-grade corporate bonds looking attractive right now?

KATHY JONES: Yeah, we think-- well, the muni market last week was a phenomenal opportunity for higher-quality state munis, we think. Now we saw some good buying in there, so the spread has closed a little bit, but we still think that high-grade munis in strong states can look attractive for investors. The valuations are still much more attractive than they were, say, a month or two ago. So that's one area. And then I think high-grade corporates, investment grade, if you say A layer above, you're probably in pretty decent shape there.

I don't think we're going back to the tight spreads that is that yield spread between corporate bonds and Treasurys that we saw before the crisis really hit. And that means you can actually start to pick up a little extra yield in some of these markets relative to Treasurys, and that really was hardly the case a month or so ago.

ALEXIS CHRISTOFOROUS: And you also say in your notes that we should be aiming for more liquidity and less leverage. How do you-- how do you suppose investors should do that right now?

KATHY JONES: Well, one of the things we're concerned about is if investors have been chasing yield and they've gone into some of these, say, leveraged mutual funds or leveraged closed-end funds, I mean, a lot of those have fallen already a lot in price, but you really don't want to be in a high-leverage environment when there's so much volatility and then the underlying value of the asset that they hold could fall in value. So we're not worried about interest rates going up as much as the value of the assets going down, impairing the ability of that fund to pay out. So the leverage is a concern whenever you're in a really volatile market.

And then more diversification, more liquidity-- it's really important to stay in very liquid assets now, and that just means look at the issues that you're buying or you're holding. Do they trade frequently? Are they large enough to attract buyers and sellers so that if you do want to exit, you're not rushing to the door with everybody else and that door is really small?

So the main idea here is not to be in a lot of esoteric, small things. You know, try to stay liquid. Try to be in, whether it's a fund or an ETF or even an individual issue of a bond, one that trades frequently and has a lot of buyers and sellers.

ALEXIS CHRISTOFOROUS: All right, Kathy Jones of Charles Schwab, always good to see you. Thanks for joining us this morning.