Yield Surge Pauses: 3 High-Yield, Low-Beta Picks - Analyst Blog

Bond yields eased off last week and bond prices firmed following a series of dismal economic reports. 10-year U.S. notes experienced their first weekly increases in nearly a month. In Germany, bunds reduced some of their losses.

Spike in Bond Yields

By mid-April, yields started moving upward all over Europe, triggered by a decline in bond prices. Recovery in oil prices, declining fears of deflation and the crisis in Greece reduced investors’ appetite for European bonds.

By the first week of May, the  yield on the benchmark U.S. 10-year note touched its highest level for 2015. Increase in European yields may be one factor responsible for the 10-year Treasury yield touching 2.24%. However, domestic macroeconomic factors have also come into play, reducing the attractiveness of sovereign bonds.

Weak Economic Data Reverses Uptrend

That said, weak economic data has now led to a reversal of events, with yields declining. This is because such reports have reinforced expectations that the Fed will refrain from raising interest rates in the near term.

The Federal Reserve System reported a fifth straight decrease in industrial production in April on Friday. A preliminary reading on May’s consumer sentiment dropped to a seven-month low. Additionally, the Empire State Manufacturing Survey Index increased, but came in lower than the consensus estimate.

Last Friday, U.S. 10-year Treasury note yields were down to 2.141% from 2.235% on Thursday. This comes after the 10-year German government bonds yields had decreased 0.2 basis points to 0.712% on Thursday, while benchmark U.S. 10-year Treasury note yields lost 4.8 basis points to 2.235%.

Near-Term Rate Hike Unlikely

But for the labor market, economic indicators have come in weak across sectors. Market watchers now believe that a rate hike in June is almost unlikely. Rates are likely to be raised only in September, or even December.

Greg Davis, Global Head of Fixed Income at The Vanguard Group said the recent surge in bond yields were difficult to explain given the relatively slow pace of economic growth. Davis cited recent economic reports, including those on retail sales and PPI as indicators that an increase in inflation was still some way off.  

Investors now await CPI data as well as the Fed minutes of its April meeting, since they will provide indications about the possible timing of a rate hike. Most analysts and market watchers believe that the fundamentals are not strong enough to sustain high yields over a long period. They think that the recent yield surge was a panic reaction and that course has now been reversed.

Our Choices

Given the current economic environment, it is unlikely that yields will continue to rise. At this point, stocks which offer higher yields with relatively low risk are possibly better choices. Below we present three stocks which will gain from these trends. Each of them provides high yield at low beta values and also has a good Zacks Rank.

Sprague Resources LP SRLP operates as suppliers of energy and materials handling services. The company stores, distributes, and sells refined petroleum products and natural gas.

Sprague Resources holds a Zacks Rank #1 (Strong Buy) and has gained 6% over the last four weeks. The stock offers a dividend yield of 6.7% and has a beta value of 0.37.

Nutrisystem, Inc. NTRI is a leading provider of weight management products and services. They offer at-home weight loss program, weight loss plans and private telephone and online support.

Apart from a Zacks Rank #1 (Strong Buy), Nutrisystem has gained 17.9% over the last four weeks. The stock offers a dividend yield of 3% and has a beta value of 0.35.

NVE Corp. NVEC is a recognized leader in the practical commercialization of spintronics. NVE's products include magnetic sensors and couplers which revolutionize data acquisition and transfer.

NVE Corp holds a Zacks Rank #2 (Buy) and has gained 5.5% over the last four weeks. The stock offers a dividend yield of 4.3% and has a beta value of 0.35.

The current market environment make bonds an unattractive proposition for investors looking for high yields and willing to take on relatively higher risk. This is why these stocks would make for a prudent choice.

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