Investors were unwilling to make any big changes to their portfolios on Thursday, opting instead to sit on their hands awaiting Friday morning’s release of the July employment report.
U.S. oil prices got a boost for a second day, rising 2.69 percent, after the Energy Information Association reported on Wednesday that weekly gasoline inventories fell by 3.3 million barrels, lowering concern over the oil supply glut. Though rebounding oil prices set a positive tone for the stock market, the major market averages finished the day little changed with the Standard and Poor’s 500 up a mere 0.02 percent and the Nasdaq Composite was higher by 0.13 percent on the day.
The big story on Thursday was the Bank of England’s announcement that it would buy as much as £10 billion ($13.33 billion) of U.K. corporate bonds starting in September, as well as £60 billion in government bonds. By purchasing corporate bonds, the Bank of England is taking a page from the European Central Bank’s play book, which started buying corporate debt two months ago as part of its stimulus efforts within the European Union. In response to the BOE’s announcement, the British Pound fell over 1.6 percent to nearly its post-Brexit lows, and interest rates fell around the globe.
Though buying bonds is just one move by central banks to hold interest rates low for extended periods, it is essentially a two-edge sword. Although it benefits corporations around the globe by providing them ultra-low interest rates, and therefore borrowing costs, it creates an environment where investors can be lured into taking excessive risk in search of yield.
After the stock market selloff in January, I was asked to take a look at an investor’s portfolio who thought they were adequately diversified between stocks and bonds. To my surprise, and theirs, nearly 40 percent of the portfolio was invested in low quality (junk) bonds, while the remainder was in stocks. Understandably, the investor was attempting to increase the portfolio’s interest payments, but didn’t realize the additional risks.
This week the top performing areas of the bond market have gotten a bounce from both the recent weakness in the U.S. dollar and the BOE’s announcement of a new bond buying program. In the No. 1 spot this week is the Citi International Inflation Linked Securities index up 1.56 percent over the past five trading days, followed by the S&P International Corporate Bond index higher by 1.32 percent.