S&P 500 Index opens lower as economic uncertainty persists. After rallying to start the week following a strong services sector reading on Monday, US stocks are following global equities lower Tuesday morning. Most major Asian indexes fell overnight, although Chinese shares extended recent gains, while European shares were broadly lower. A global pickup in COVID-19 cases is raising new concerns about the pace of the economic recovery.
Another solid quarter for bonds. The Bloomberg Barclays Aggregate Bond Index returned a solid 2.9% in the second quarter, its eighth consecutive quarter of gains and best two-year number since 2010. Economically sensitive bond sectors led, but most are still in negative territory year to date. We expect gains to be limited for core bonds over the rest of 2020 and into 2021. We continue to favor mortgage-backed securities for their combination of reasonable income, solid relative valuations, and resilience if rates rise. Read our review of fixed income markets in the second quarter in today’s LPL Research blog.
COVID-19 news. On Monday, US new daily cases rose 8.7% week over week to 45,000, well below the near 35% weekly increase reported July 3 (Source: Johns Hopkins). Despite a drop in reported tests over the week, the curve for the latest wave appears to be flattening. Bloomberg reported new cases in Beijing fell to zero for the first time in 26 days. Australia’s second largest city, Melbourne, was put back on lockdown amid rising infections (Source: COVID-19 Tracking Project).
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A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage, or more commonly a collection (“pool”) of sometimes hundreds of mortgages. The mortgages are sold to a financial institution (a government agency or investment bank) that “securitizes”, or packages, the loans together into a security that can be sold to investors. The structure of the MBS may be known as “pass-through”, where the interest and principal payments from the borrower or homebuyer pass through it to the MBS holder, or it may be more complex, made up of a pool of other MBSs.
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