Bond Market Signals Rough Road Ahead: 5 Top Safe Picks

Wall Street continues to reel under severe volatility this month. On May 23, all three major stock indexes –- the Dow, the S&P 500 and the Nasdaq Composite –- tumbled 1.1%, 1.2% and 1.6%, respectively. These indexes are on the verge of closing in the negative territory in May for the first time since 2012 when the European debt crisis occurred.

The year-long, U.S.-China trade conflict is worsening by the day and no near-term solution is in sight. Several economists have expressed concerns that the lingering trade spat will result in global economic slowdown. Various weak economic data from the United States and Eurozone have added to the woes. Consequently, investors opted for safe-haven sovereign bonds, leading to sharp fall in yields.

U.S. Government Bond Yields Plummet

On May 23, yield on the benchmark 10-year U.S. Treasury Note tumbled 9.7 basis points to 2.296%, its lowest since Oct 13, 2017 and stiffest daily decline since Jan 3, 2019. Yield on the short-term 2-year U.S. Treasury Note tank plunged 10.1 basis points to 2.13%, marking its lowest level since Feb 13, 2018 and biggest daily drop since Jan 3. Meanwhile, yield on the long-term 30-year U.S. Treasury Note skidded 8.6 basis points to 2.732%, its lowest level since Dec 15, 2017 and largest daily decline since Dec 4, 2018.

Trade Conflict Worsens

On May 22, U.S. Treasury Secretary Steven Mnuchin said the schedule for the next round of trade negotiations with China remains undecided. On May 23, Gao Feng, spokesperson for China’s Ministry of Commerce, said that the United States needs to correct actions in order to resume trade talk.

So far, the U.S. government has imposed 25% tariffs on $250 billion Chinese goods while China retaliated by slapping 25% tariff on $170 billion of U.S. exports. Further, President Trump expressed his desire to levy 25% tariff on another $325 billion Chines products, which many industry watchers believe can be implemented by late this year or early next year.

Additionally, on May 15, the Trump administration blacklisted Chinese behemoth Huawei Technologies from doing business with U.S. counterparts. However, the government granted a 90-day window to U.S. companies to supply inputs to Huawei so that no existing users suffer immediately.

Weak Economic Data

IHS Markit reported that U.S. manufacturing activities fell to a nine and-half-year low in May to 50.6 from 52.6 in April. Although any reading above 50 indicates overall growth for the manufacturing sector, the sharp decline in growth rate indicates an impending slowdown of the U.S. economy. Additionally, the Department of Commerce reported that new home sales in April decreased 9.6% to a seasonally adjusted annual rate of 673,000.

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In the Eurozone, the Ifo business-climate index of Germany slipped to 97.9 points in May from 99.2 points in April. Moreover, the IHS Markit reported that Eurozone Composite PMI -- a measure of activity in the manufacturing and services sectors –- inched up to 51.6 in May from 51.5 in April. However, the growth rate has slowed down significantly from the first quarter of this year.

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). 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. You can see Zacks Investment Research