Monday, October 12, 2015

Why Fed should have Chosen to be data dependent and why not anymore.

It’s good to be back writing something after a long while. Better late than never, they say  J.
The Fed’s delayed hike has been causing some stir in the markets recently. The markets expecting a rate hike in this year, were largely caught wrong footed by dovish Fed as the year draws to a close. Despite encouraging data –on average- the Fed’s caution draws a lot from mix of external as well as internal factors. The markets seem to have become self-aware,  causing a volatility in  betting on Fed’s first hike as the Fed remains muted and largely vague in their decision about selecting and conveying the.
What are the reasons behind it? There may be many, but my two cents say that Fed itself is responsible for this confusion among the markets.  How do I believe so? This goes back months when I was listening to the interview of a US Navy Pilot describing his aircraft “departing” or losing control and stalling. His reaction was,” If I’d try to fight the situation by increasing the throttle, I’d only had ended up making it worse. So I just put my hands in the lap and enjoyed the ride until the aircraft stabilized”. Similar was the case with most of the central banks when the emergence of  The Great Recession tested the policy innovation capacity of the central banks in developed world. From rate cuts to various forms of QE, every central bank did what it could do so i.e. take a shot in the dark and hope for a bullseye. It was largely because
1.       Central Banks didn’t completely know the extent of the crisis.
2.       And they couldn't fight the crisis with conventional wisdom.
So the just like a fireman not knowing which rooms are on fire, they took the safest bet i.e. covering the whole building with water cannons and rolled out very large QE programs. Equally important alongside firefighting was rescue job. The Central Banks were not only to fight the crisis but also tag markets along. And since the economy was like the plane of Naval aviator, they did what they could do best i.e. wait and see,
Resultantly, the central banks became data dependent in their outlook because
1.       It lent more transparency to central bank’s decision in the time of great uncertainty.
2.       It took the burden off the Central Banks and gave markets a benchmark for recovery.
The strategy worked well for good period of time as the recession retreated and recover started to take place. However, there was a key shortcoming in adopting this strategy i.e. data’s inability to be used as a policy tool e.g. Interest rates, Reserve Requirements etc. It’s just like a turkey hunter putting one’s gun on a random shooting machine. The shooter is indifferent in night as the both would aim almost equally effectively. But as the day approaches and hunter sees turkeys moving around, the random gun shooting machine spoils his chances of shooting more accurately by himself. Likewise, the policy of remaining data dependence may have worked exceptionally well during the days of the crisis but it may do more harm than good in the days when there’s a greater extent of certainty around.  In addition, this data paradigm is strictly engulfing the market thinking i.e. The data will drive the Central Bank. Result is a rapid plunge in rate hike expectations as soon as the two NFP numbers came below expectations.  Also, if Fed continues to hold onto this notion of being driven by data, then I don’t really see a good chance of rate hike before June 2016. I’d say so because the seasonality continues to affect the data during the winters and markets, believing that Central Bank would be driven by the data flow, would push the rate hike expectations further despite Central Bank seeing it as a appropriate time for policy normalization.
So in the end, I believe that it’s about time that  Fed
1.       Determines the appropriateness of remaining data dependent
And, if she feels so, to exercise more judgment about the outlook so that the uncertainty is reduced and markets have a clear view of when a rate hike would be more probable.

Note: Errors and Omissions are expected because I didn't get it proof read by someone.

Monday, April 8, 2013

Yen Yen everywhere, nobody to spend?

In a last ditch effort to fight prolonged recession, BoJ finally launched the much anticipated unlimited QE. In short, the policy focuses on keep pumping the money until the inflation doesn’t reach the target level of 2%. Though the decision remains well debated in financial media, whether it would be successful or not, remains yet to be seen. Yen, nevertheless, clearly weakened as a result of this. Perhaps one may always argue that weakened yen is always good for an export dependent economy (like Japan) but the transmission mechanism is not simple to comprehend. Especially in the context of ongoing currency wars where any act of currency weakening is quickly responded.
Despite above arguments, the key to growth remains consumption. Japan’s case is also special in respect that Japan is gradually becoming a nation of elderly. Panel 1 presents the dynamics of population in Japan.  Here the population is distributed into three major catagories 1) Childern (0-14 Years) Working pool (15-65 Years) and the elderly (65+ years). It is clearly visible that the share of elderly is on the rise while the working age population is shrinking. In addition, the share of newborns has also fallen. What seems more worrisome is that the gap between the outflow from the working (65+ year) pool and inflow to working pool (0-14 years) has turned negative for women much earlier than men. This not only has implications for labor markets but also for the ability to replenish the national labor pool. The portion of fertile women (proxies from age distribution) has fallen significantly. If kept unchecked, sooner or later it would start to drag the male labor pool as well.
Furthermore, in order to check the trends in saving, I calculated the savings to investment ratio for the country. The higher the ratio, the less the conversion of savings into investment (i.e. more idle/unproductive) savings. Interestingly, the ratio has been consistently rising over the time (Figure 1). This means that Japanese are saving more but investing less. This can be proved theoretically since the trade off between the future consumption (savings) and current consumption is determined by interest rate (for detailed understanding of the concept please see Prof, S K Chug’s notes here). However, since the real interest rates are positive not because of positive nominal interest rate (which requires investment of money) but negative inflation (which doesn’t require investment of money) it may very well be possible that Japanese population would be indifferent between cash savings and not the investment. Furthermore, it can also be argued that since the average age of Japanese population is increasing, thus it may also be possible that lack of investment has to do something with that. Whatsoever the reason may be, apparently Japanese are saving more and investing less.
To investigate the matter further, I took the Japanese household expenditure data (2 or more members in the household) from December-December basis (available here). Panel 2 represents the trends across categories of expenditure. Interestingly, trends in most of the expenses were either stagnant or decreasing. Furthermore, I also categorized the expenditure in inelastic (necessary expenditures) and elastic expenditure and plotted them over time (Panel 3).Interestingly, not only elastic expenditures but also inelastic expenditures have shown a decreasing trend. This also indicates that Japanese are not only saving more, but also spending less. To further investigate whether ageing had to do anything with spending I plotted the proxy of population replenishment gap (The gap between the 0-14 and 65+ years old population over time) and then plotted them against both elastic as well as inelastic expenditures (Panel 4). The results turned out to be pretty interesting. While the elastic expenditures decrease alongside the increasing gap (which is understandable), it appears that the increasing gap has also started to affect the fixed expenses as well. As the gap was reducing (in positive territory), the fixed expenditures were increasing but as soon as the gap started to turn negative (sometime around 1996-1997), the fixed expenditures have also started to fall. This means that as more and more population becomes aged, the deflation spiral is going to be prolonged, something which can’t be countered by just increasing money supply.

Japan's problem is not that it lack's money. Its problem is that it lacks people who would spend that money.

A Note on Reproducibility:
Author considers reproducibility as an essential tool for acceptability, improvement and propagation of understanding. The code and data file can be downloaded from links provided below. (Programmed in STATA)
I owe an intellectual debt to Dr. Farooq Pasha (A good friend and my instructor in Macro-Economics) and Dr.Sanjay K Chug (For his generosity by making his lectures available on net)    
(The blog-post and code-file are the intellectual properties of author. The material can be used for all legal and valid purposes with proper referencing.)


Tuesday, April 2, 2013

Fed: A Story of Success and Failure?

Hi folks, it’s good to be back again. A change in job and hectic study schedule has proven too much for me recently. But nevertheless, the germs of curiosity in my blood have kept me motivated for searching and analyzing data (a thing I’m crazy about).

While Federal Reserves (Fed) and other central banks have faced a diversity of opinions (both positive as well as negative), one thing can be said with fair amount of certainty. The central bank has been broadly successful in arresting the escalation of crisis, (if not helping recovery). Even Ben reiterated on several occasions that the current crisis was indeed a novel yet challenging experience for the policymakers (including the central banks). However, despite fiscal constraints in place -amid fiscal cliff fiasco- fed has to undertake the risky yet uncertain task of simulating the crisis ridden economy. While overall picture may not be as impressive as one could hope, but there are certainly some bright spots for which Fed deserves its due share of appreciation.

Let me start up by a simple concept that why fed needed to act when the economy was dwindling. As the economic activity contracted, so the prices started to cool down. Now though a common man would love to see the prices fall (since it increases his real income), a consistent fall of prices is as equally dangerous for an economy as a consistent rapid increase (aka hyperinflation). On the face of it this looks quite disturbing -since the deflation has a positive effect on consumer’s welfare- yet a deflation spiral is as dangerous for the general economy as hyperinflation. And yes we do have living examples of both phenomenon. If the examples of hyperinflation include Germany, Russia and more recently Zimbabwe. Japan serves as the classical example of a deflation spiral where consistently falling prices can cause an economic limbo. How does that work? It’s quite simple. The spending and saving decisions of economic agents are inter-temporal (though Stochasticity is also an important component but it’s less relevant to current discussion). This means that economic decisions are not only motivated by current state of affairs but also the expectations. So if expectations change, the optimal mix of saving consumption decision changes.  Thus, if an average economic agent expects that the prices are going to be lower in the subsequent period, he will postpone his consumption. Resultantly, the aggregate demand will shrink, resulting in further deflation and market surpluses. The producers don’t like surpluses, so the aggregate supply curve would shrink resultantly, bringing economy to lower output (GDP) level. And this spiral would turn vicious if the deflation expectations are not combated by appropriate policy mix.

Here I have put forth some data analysis of inflation expectations using data from Bloomberg and FRED to understand whether Fed’s achievements are confirmed  empirically. The data consists of monthly observations from Jan-05 to Nov-12 (95 Obs) for a generalized index of inflation expectations (U Michigan Inflation Expectations) , data for short and long term Nominal Rates (2Y,10Y) –intentionally skipped 5Y- and their respective breakeven –another proxy for market inflation expectations- I also included the data for avg weekly labor hours and overtime for analyzing the implications of Fed’s policies on Labor market.

Question 1: Does implied inflation necessarily reflects the general inflation?
Well since the participants in financial markets are believed to behave in a similar way as the economic agents in the general economy, it can be implied that the expectations revealed by the investors in financial markets should be similar to the latent preferences in the general economy. Here is a graph showing relationship between U Michigan IE  and 2 Year BE. Figure 0A reveals a strong relationship between general inflation expectations and BE. However, the analysis through time –Figure 0B- reveals that BE is a more sensitive and volatile measure than the general inflation expectations. This makes intuitive sense since the participants in the financial markets adjust more rapidly to new inflation expectations than the general economy.

Question 2: Was Fed able to successfully combat the deflation spiral?
 A close analysis of Figure 1 reveals that though the inflation expectations fell sharply amid the financial meltdown. Fed’s QE program (Especially QE2) was able to restore the inflation expectations to pre-crisis levels, successfully evading the dangerous deflation spiral (though deleveraging impact undermined the importance and success of restoration of inflation expectations). So Fed does deserve the credit for not allowing US economy to slip into Japan-type economic limbo.

Question 3: Was the introduction of O-Twist and QE3 a good decision?
Well Fed can be allowed benefit of the doubt since the macroeconomic picture was 1)Desperate 2)Complex. However, Figure 3A suggests that inflation expectations were pretty much averaged along the long term mean and became more well behaved. Furthermore, Figure 3B indicates a decoupling between the longer term nominal interest rates and Breakeven. This effectively means promotion of a wealth destruction effect for the longer term. In fact, it was post QE2 that the decoupling effect became more prominent. Thus if Fed continues to encourage wealth destruction, agents would tend to rebalance their portfolios by either 1) Seeking insurance in TIPS 2) Spending (which Fed Wants them to do)  3)shifting to the shorter end of the curve being risk averse. Thus, except scenario 2 Fed’s policy -of promoting lower long-term lending rates- would be undermined as long term funds market may face a shrinkage of supply. Yet one thing that goes to Fed’s advantage is that the long term inflation expectations are fairly upward sticky (Figure 2).

Question 4: What are the implications for Labor Markets?
Since Fed operates with dual mandate (inflation and employment), it is also crucial to see if Fed’s actions may have a significant effect on the labor market.
Figures 4A, 4B and 4C plot the average weekly over-time and labor-hours against inflation expectations against both short and the long term inflation expectations. What’s more interesting to note is that the short term inflation expectations actually drive the dynamics of the labor market. The average amount of labor and overtime supplied tend to fall as the inflation expectations exceed around 3.5%. However, the long term inflation expectations don’t have any negative impact on the labor market. Thus this leaves us with two arguments 1) Fed can employ as much OT as it wants in the Longer-end of the yield curve because it doesn’t impact the labor dynamics or 2) Fed is targeting the wrong expectations since the bulk of the labor market is driven by more volatile short term inflation expectations.

Its getting 2:23 in the night and I have a training to attend at 8PM so I would call this a day. However, I’ve uploaded both the data as well as the code file (do file). Feel free to extend the analysis and correct me if I have got it wrong somewhere. Here's the link

(This material (blogpost and codefile) is the intellectual property of the author. It can be used for all legal and valid purposes given the original source is properly acknowledged.) 

(Note: Pictures get messed up as I upload them. However, they are appropriately numbered so you shouldn't find it much difficult to figure out which figure belongs where)

Tuesday, December 25, 2012

A solution to Europe’s curse: United States of Europe?

A few days ago, EU chief José Manuel Barroso hinted that the ultimate solution to Eurozone’s ongoing crisis called for greater fiscal integration. Though the task apparently seems very challenging given the strong political biases in the region, it is important –in itself- that the leadership has started to discuss such sensitive issues which remain critical to the survival of Eurozone. Though European Central Bank (ECB) didn’t hesitate to bring in its bazookas (LTROs, SMP and now OMT) to reduce the fears of downside but deep down everybody knows that ECB is just kicking the can down the road. Because theoretically while ECB can buy all the troubled sovereign debt through its liquidity injections programs, those debts either have to reverse –causing liquidity constraints- or have to be effectively written off by haircuts –resulting in direct injection of hot money-  both requiring a further action and ultimately a vicious spiral like a ponzi game.
While Eurozone has offered great political and economic benefits for its members, the eurozone has always been a heterogeneous mixture with different political as well as economic structures and policies. For example,
1-      Eurozone continue to suffer from differences in economic competitiveness. At one extreme there are countries with very high economic efficiency like Germany, France and Netherlands etc and on the other hand there are economically uncompetitive economies like Greece, Portugal, Spain and so forth.  Even if Eurozone would operate closed, these differences would ultimately result in assets laden competitive countries and debt laden uncompetitive economies unless the union operated in perfect harmony (Balanced trade and budget accounts). However, this would only be possible given all the economies converged to similar competitiveness that would only be possible
a.       If Competitive economies would shed some of their competitiveness, which has not happened.
b.      Or if the uncompetitive economies would grow rapidly in competitiveness to catch up with competitive economies, which hasn’t happened either since its too unrealistic to suppose that Greece would become Germany in a decade or so.
So in either case, sooner or later, a collapse would be imminent due to structural imbalances which need to be addressed when idea of creating such union was being worked out.
2-      The eurozone economic and political dynamics can be considered as a game with peripherals holding the moral-hazard card. If Greece had piled up debt from both within and outside the Eurozone due to its uncompetitiveness, the easiest way would be to default on the debt since it naturally didn’t have the capacity to generate enough resources to  pay them back. However, if Greece defaulted on her debt, the choice of second player –say Ireland- would also be to default on her debts since she faced a similar problem. But this chain reaction would also mean the destruction of assets held by competitive economies because their asset holding would effectively be the debt issued by peripherals (A classical piece on the issue was written by Martin Wolf named “The grasshoppers and the ants – a modern fable” see notes for reference). This would also mean that if a competitive country - for example Germany - is perceived as economically strong, it is because it derived its growth and asset holdings from economically uncompetitive economies and thus could not escape the damage of chain reaction, if started. So the best interest of such countries would be to stop peripherals from defaulting by bailing them out (what has been happening so far).
3-      Thirdly Eurozone has been in a situation where one Monetary Policy has to face 16 different Fiscal policies by individual members. This not only makes Monetary Policymaking challenging for ECB but also distorts the Monetary-Fiscal coordination. Furthermore, banking regulation of monetary union has also been a challenge where around 6000 banks operate under the supervision of different national central banks with varying degrees of supervision and regulations.
However, would such proposal be a workable idea?  Answer can be yes.  For example, we can look at the economic model of US where different states operate with greater autonomy under one federal administration. For example, a state can levy taxes on her residents, can raise debt from market with municipal debt. Likewise a similar model can be adopted for Eurozone with greater political acceptability. This may include
1-      A tax contribution or tax for proposed supranational fiscal body (just like federal taxes in US)
2-      Autonomy to raise domestic taxes as well as debt as per needs of member countries.
This would be more acceptable to general residents since
1-      All residents will pay similar tax
2-      A tax contribution would be more acceptable to common German -given a Greek is also making a similar contribution- instead of footing the German funded bailout of Greece.
The economic benefits of such a superanational body would be manifold for economic stability of the region since
1-      The Collected taxation at superantional body may be used in restoring the economic competitiveness across the region. This can either be done by supernational-regional government partnership projects or directing the funding to its most efficient use. This would effectively create a development wedge which would be helpful for peripheral countries in need for infrastructure investments.
2-      Since the financial position of Superantional body would be much improved vis-à-vis member countries (due to revenue generation ability), the supernational body would be able to raise funding much more economically as compared to member countries. Thus this would also help member countries bring down the costs of their development expenditures since the high cost of debt raising would mean more cost on development activities of government as well.
  Though arguing about the feasibility- both politically and economically- of idea and appropriate structure would be farfetched at the moment. But there is, nevertheless, a growing awareness and political will amongst the policymakers that a collective effort would be required to tackle the issue on permanent basis. The only thing of concern is that whatever to be done should not be “too late to be done”. 
(This work in an intellectual property of Author, I have no issues with the material being used given accompanied by a proper acknowledgment of source)   
1-Barroso calls for EU ‘federation’ 
2-The grasshoppers and the ants – a modern fable

Sunday, December 9, 2012

Can Maradona Really help Policymakers?

Coined by Sir Mervyn King, the maradonian theory of interest rates holds that a central bank may let expectations of economic agents work to its advantage instead of acting. An avid fan of soccer himself, Sir Mervyn actually derived his theory from one of the most astonishing goal runs made by Diago Maradona where he single handedly beat five English midfielders to score one of the most celebrated goals in the history of soccer. He argued that after receiving the ball near centerline, Maradona -famous for his turns and dribbling moves- interestingly made a straight run towards the English goal. The English midfielders, who were expecting him to make usual fast turns, were taken by a complete surprise.
Likewise he argued that a central bank, after fueling expectations about interest rates, doesn’t necessarily needs to act since economic agents start making behavioral adjustments under expectations. To what extent he can be agreed with, is debatable. I will try to put forth both arguments for and against this in the later section.
A fact that has certainly worked to the advantage of Central banks has been that inflation hasn’t picked up. While Ben, Dragi and King may attribute this to central bank’s credibility, softening commodity and oil prices, household deleveraging and sluggish global growth did play their role in keeping the aggregate demand subdued especially in developed economies. Secondly and importantly, the inflation expectations didn’t pick up despite Central Banks launched rounds after rounds of their analogs Quantitative Easing program –interestingly, BoJ is now being pressed for an open ended QE by political policymakers-. Despite all odds, Central Banks did succeed in keeping the monetary policies accommodative yet at no risk of inflation –the only exception is BoE where inflation remained over inflation target for an intended period subsequently softening-  
However, one should ask himself if Maradona scored such a spectacular goal again? Or putting in literal words can a central bank can just ‘cheat’ an extended period of time by not acting? Answer is quite obvious. A simple example used in Macroeconomics is the impact of central bank’s credibility over labor supply. It says that economic agents engaged in labor initially increase their labor supply given central bank outsmarts them by allowing a higher inflation. Result is an increased labor supply and increased output at higher prices, leading to an expansion. However, as the central bank keeps outsmarting them,  the ultimate result is the demands for wage indexation or a decreased supply or labor hours since the labor’s price for labor falls relative to leisure, resulting in people preferring not to work.

To further elaborate why Maradona can’t always make a blistering run consider the market as English players and maradona as central bank. In scenario A markets are so used to central bank’s credibility that they virtually neglect the possibility that central bank would cheat them.
This given central bank a chance to ‘cheat’ them, resulting in higher economic activity at higher inflation which agents consider exogenous rather than a direct result of central bank’s actions. However, given central bank repeats the strategy and defeats the expectations of economic agents, economic agents start to price in the possibility of “cheating” and start positioning them for inflation (Scenario II).

The more central bank doesn’t act, the weaker the credibility grows and less effective central bank becomes for an economy since if the cheating behavior becomes obvious, the agents start seeking inflation protection (Scenario III). 
This is quite obvious from the subsequent rounds of QE by central banks which has fueled more inflation expectations than initial ones because markets came to realization that “Bazooka” with the central bank no longer works.
So can maradona help policymakers? Yes it surely can. However, can it always help policymakers? The answer depends upon till how long it can pull out the same stunts while keeping others dumb. In Next post I will try to post some of the empirical evidences for this phenomenon. 
(This work in an intellectual property of Author, I have no issues with the material being used given accompanied by a proper acknowledgment of source) 

Monday, November 12, 2012

Duration management and bond strategies in low interest rate environment.

A fixed income (FI) instrument –more commonly called a bond- is an instrument which provides a consistent/fixed stream of cash flows throughout its life. Unlike shares and other financial instruments -e.g. options etc- where returns are uncertain and unknown, fixed income instruments often provide a stable and already known stream of income for foreseeable future. With greater volatility and uncertainty surrounding the markets, fixed income instruments become lucrative since their returns are known with a greater certainty for foreseeable future. However, the return certainty doesn’t necessarily makes them “risk free” security. In fact, traditionally perceived “risk-free” FI instruments –Treasuries, Tips etc- also entail variety of risks with them. To further elaborate the concept, the bond, return /yield or coupon is a function of: 1 )Maturity 2)liquidity 3)Market returns 4)Ratings 5)Returns of alternative assets 6)Issuer profile etc. Thus what we consider a “risk free return” on a Treasury security is actually a collective compensation for various kinds of risks except credit risk.

Since now we have argued that even so called “risk free” securities are actually a bundle of various risks, there is always value in the market up for grabbing since fluctuations in risk factors keep generating opportunities to generate extra returns. That’s why we see growing active investment mandates for treasuries and other risk free securities since there are always opportunities available given appropriate strategies being used. I will discuss some of them in this article. However, consider this as a primer for active FI management, it is essential to thoroughly understand and predict the future path of interest rate and linkages of financial markets and economy with interest rates to properly position oneself for a winning bet.   

First and foremost risk that offers profit opportunity is what we call “price risk”. It means that while face value of FI security coupons and remains same and does not change, its market price does. To understand the dynamics, just consider a bond to be any commodity, say an IPhone. When there is an excessive demand, the holder of IPhone has the incentive to sell IPhone at significantly higher prices. This is exactly what happens when markets are gripped by uncertainty and volatility. Investors seek certainty of returns and thus gravitate towards Treasuries –increasing their demand and thus prices- thus if an investor expects troubled times ahead, it’s just the right time to enter FI market. However, there is a limit to the price appreciation potential since: 1) yield of FI instruments usually don’t fall into negative territory 2) This is a tactical trade –not a buy and hold trade- since price will converge to its par value as the bond matures.

Furthermore, investor can also make decent money out of duration bets. Duration is the % change in the price of security with respect to % change in price. Many analysts and portfolio managers quote duration in terms of years. However, it is incorrect to consider duration as a concept related to maturity or time. Duration is the sensitivity of security with respect to change in interest rate. This sensitivity in turn, is determined by host of factors including the coupon rate, years to maturity, credit ratings etc. To be a bit more elaborative, just consider the Time Value of Money concept. For example if a bond’s coupon and principals as cash flows while the current market rate is the discount factor. The value of bond with higher coupon and longer number of cash flows (maturity) will be more affected by movements in interest rates. This strategy is useful given the longer end of the curve (long term interest rates) remain very volatile to the developments in the market. Since the central banks have a good control over the short term rates (1-3 Years) thus duration bets for the short term rates can be successful if the central bank behavior can be anticipated.

Moreover, the sector allocation can also be used to a good effect in enhancing returns especially investment grade securities and Mortgage Backed securities. MBS securities of federal agencies like Fannie Mae, Ginnie Mae and Freddie Mac can offer a decent yet safe spread (around 20-50 bps) over the traditional treasuries. Furthermore, the maturity of these securities is usually much less than the traditional treasuries (due to prepayment option) making them more acceptable for investors with short term needs. In addition to high quality MBS, a conservative investor seeking yield may also invest in investment grade corporate bonds. This has been especially a very lucrative option since corporate continue to accumulate cash on their balance sheets in the aftermath of great depression. So while high cash on the balance sheet is not favorable for equity investor since it is not an earning asset, it is very favorable for bond investor since even at higher yield than the treasuries, a liquid balance sheet means enhanced credit worthiness. Furthermore, the bond yields also don’t respond as vigorously to bad news (e.g. credit downgrade) as the equity prices. Thus a good yield is on offer to investor if he knows which sectors to are much actually safer than presumed by market.  

(This work in an intellectual property of Author, I have no issues with the material being used given accompanied by a proper acknowledgment of source)