June’s stellar jobs report eased worries about the U.S. economy, helping stocks move north. But, demand for bonds continues to increase pushing their price higher and dragging yields to record lows. Traditionally, stocks and bonds move in opposite direction as stocks are considered risky assets, while bonds are safe-haven bets.
So, why are investors latching on to bonds despite the encouraging jobs report? That’s simply because investors are still concerned about the impact Brexit will have on Britain’s economy. Global growth is also expected to slow down, creating fresh bouts of volatility in the financial markets. As bond yields decline, income seeking investors look for funds that are exposed to stocks providing juicy dividends. A low interest rate environment is also a boon for dividend paying companies.
U.S. Bond Yields Closed at Fresh Lows
It seems long-term bonds are out of sync with the economy. Despite the strongest employment report in eight years, which confirmed that economic expansion is still intact, safe havens such as bonds were still bought. Payrolls in the U.S. grew by 287,000 last month, way above analysts’ expectations, dispelling fears that the U.S. economy was headed for a recession.
Bond prices increased due to higher demand, but their yields plunged. According to Tradeweb, the 10-year Treasury note settled at 1.366% on Friday, slightly below its previous record close of 1.367% set on Tuesday. The 30-year Treasury yield closed at its lowest ever level of 2.110% on Friday (read: What is a Bond Yield?).
Like the Treasury yields, term premiums too have fallen considerably in recent times. The term premium is down to a record low of 0.71 percentage points. Term premiums are the excess yield that investors demand for holding a long-term bond instead of a series of shorter-term bonds (read: What We Do and Don’t Know about the Term Premium).
Free Fall in Yields Across the Globe
Investors in Europe and Japan continue to pile into government debt, dragging down yields. According to Bank of America Corporation (BAC - Free Report) , about $276 billion of euro-denominated corporate bonds are trading at a negative yield. Italy has around $1.6 trillion worth of negative-yielding sovereign debt. The yield on Germany’s 10-year bund slipped less than 1 basis point to a negative 0.17% on Friday, while U.K.’s 10-year gilt yield was also down less than 1 basis point to 0.77%, according to Tradeweb (read: German, U.K. bond yields fall closer to record lows).
Citigroup Inc. (C - Free Report) added that almost 80% of Japanese government bonds have negative yields. Elsewhere, in other developed nations like New Zealand, 10-year bond yields decreased to about 2.3% from 3.6%. Overall, global negative-yielding debt is around $13 trillion, while it was almost none in mid-2014, according to Bank of America.
So, why are investors pouring into U.S. debt, driving yields lower? This is because they harbor serious concerns about the strength of the global economy particularly after the late June British referendum to leave the EU. British voters ignored common wisdom and the advice of notable economists to vote in favor of an exit. Market pundits had warned that a Brexit will negatively affect financial conditions and the global economy.
Fed Chair Janet Yellen had said that such a move would “usher in a period of uncertainty” and fuel volatility in world markets. A Brexit will lead to lower business investment in Britain and muted consumer confidence. This in turn will have an unfavorable spillover effect worldwide and the U.S. won’t be spared either (read: Brexit Wins, But at what Cost to British Firms?).
5 Best Dividend Mutual Funds to Buy Now
Companies that have comparatively higher and stable dividend yields are more attractive now, thanks to the decline in Treasury yields. Income-focused investors will now turn toward mutual funds exposed to such dividend paying stocks that provide the regular cash they are seeking. Additionally, interest rates around the world are falling even lower after U.K.’s Brexit vote, which makes dividend payers more alluring (read: Do Interest Rate Changes Affect Dividend Payers?).
By the way, a dividend yield of more than 5% is the sweet spot. This is because investors can expect some growth, which is important in any investment as higher growth leads to higher returns. Moreover, such a yield will add to cash inflows and with more money in the pocket investors can buy more shares especially in a falling market.
Hence, we have selected five dividend paying mutual funds that offer a dividend yield of over 5%. Such funds boast a Zacks Mutual Fund Rank #1 (Strong Buy) and their percentage of net assets invested in common stocks is greater than 70%.
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear (read: The Advantages Of Mutual Funds).
Lazard Global Listed Infrastructure Open (GLFOX - Free Report) invests in equity securities of common stocks of infrastructure companies. GLFOX seeks total return and its dividend yield is 7.65%.
Lazard Global Listed Infrastructure Institutional (GLIFX - Free Report) invests a large portion of its assets in equity securities of companies, which consist of utilities, pipelines, toll roads, airports, railroads, ports, and telecommunication companies. GLIFX seeks total return and its dividend yield is 7.88%.
US Global Investors World Precious Minerals Institutional (UNWIX - Free Report) invests the majority of its assets in equity-related securities of companies engaged in the exploration for, or mining and processing of, precious minerals. UNWIX seeks long-term growth of capital and its dividend yield is 5.65%.
US Global Investors World Precious Minerals (UNWPX - Free Report) invests a major portion of its assets in equity-related securities of companies involved in exploration for, or mining and processing of gold, silver, platinum group, palladium and diamonds. UNWPX seeks long-term growth of capital and its dividend yield is 5.08%.
Oppenheimer SteelPath MLP Select 40 A (MLPFX - Free Report) invests a large portion of its net assets in the equity securities of master limited partnerships. MLPFX seeks total return and its dividend yield is 6.59%.
About Zacks Mutual Fund Rank
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