To get the Best of the Bond Market delivered to your email daily click here.
After yesterday’s article by Jack Bogle about leaving your portfolio well alone ahead of potential market volatility. Today we offer an opposing view, this time from PIMCO’s chief executive and co-chief investment officer Mohamed El-Erian.
In today’s FT, El-Erian says.“Don’t wait to reposition portfolios as uncertainty will trigger volatility.”
El-Erian went on to say that whilst “August is not traditionally a good month to reposition your portfolio”, this year is different, since the next few months promise to be particularly volatile for markets. With uncertainty coming from the US, Europe, Japan and the Middle East.
So what does he mean by “reposition your portfolio?” Well, you need to prepare your portfolio for an era of high interest rates and low bond returns. Thomas Kenny has a great article here, which shows you the kinds of investments you should be making as well as those to avoid.
The bottom line is, don’t bury your head in the sand. Rising interest rates are coming and you can be sure your bond portfolio will be hit. By reading this you’re ahead of most Americans who don’t appear to know that rising interest rates will hit their bond returns. Now you need to act before the storm arrives.
Todays Other Top Stories
Benzinga: – Bond Investors Beware: Mutual fund outflows accelerating as interest rates climb higher. – so far for the month of August, $19.7 billion has been pulled out of U.S. bond mutual funds and ETFs. This is causing interest rates to continue rising, and all of this has occurred before the Federal Reserve has even begun adjusting its monetary policy. As I’ve stated many times, people are underestimating the impact of the upcoming policy changes, and higher interest rates are here to stay.
The Fat Pitch: – The big move down in bonds may be over. – Bond yields are either close to stabilizing or, potentially, reversing lower. Most Individual and professional investors have already made a big move out of bonds, so they may already have hit the bottom.
Learn Bonds: – Nine dynamics of corporate bond default loss risk. – There are nine factors involved in corporate bond default loss risk. In this article, we will explore all nine factors in more detail.
InvestmentNews: – Junk bond junkies are going short (term). – Rising interest rates have yield-starved investors moving into short-term high-yield-bond funds, and mutual fund companies are planning new products to meet the demand.
Cate Long: – Muniland is shrinking. – The tone of muniland has changed from rosy bliss to a rocky road this last year. Detroit’s bankruptcy filing must have sent a chill down the spine of every municipal official. Intensifying short-term pressures include massive outflows from municipal bond mutual funds, which crimps their ability to be buyers in the primary market. It’s a stormy sea in muniland. Muniland is shrinking. Pressures are weighing on issuers and much of their necessary funding can be deferred. It’s likely that muniland will continue to shrink.
MuniNetGuide: – A look at bond insurers’ exposure to muni credit trouble spots. – A look at the bond insurers’ exposure to other muni credit hotspots, such as Detroit and Chicago.
MarketWatch: – Fixed-index annuities as bonds alternative? – Recent bond interest rate increases, combined with the prospect for continued interest rate hikes, have gotten the attention of investors, resulting in reduced bond holdings in many cases.
Reuters: – Detroit’s bond creditors skip initial bankruptcy fight. – Detroit’s municipal bond creditors did not object to the city’s historic bankruptcy petition by Monday’s deadline but may be gearing up for a bigger battle down the road that could pit payments on city bonds against pension payments.
Reuters: – U.S. municipal bond market braces for tax overhaul. – Weeks before lawmakers unveil a proposed overhaul of the U.S. tax code, investors and firms tied to the municipal bond market are trying to head off their worst fear – caps or cuts to the tax exemption for interest on debt sold by cities, states and other government bodies.
Wealth Daily: – Investors flee bonds. – Investors are fleeing from bonds at an alarming rate because of the rising yields. Bond yields are correlated with the demand for money, so when production goes up, bond yields often increase too.
Daily Finance: – 3 safe bond alternatives to protect your portfolio. – Many people have moved their bond money into the stock market and other alternative investments. With high dividend yields, you can get more income from those investments than bonds pay right now. But they also come with considerable risk of loss. With the goal of safety and security in mind, let’s look at some bond alternatives that won’t make you lose your shirt.
CNBC: – Keep selling bonds—that’s what Bernanke wants you to do. – Bond yields will continue to rise, but don’t say that the Fed has lost control. Actually, this is Chairman Bernanke’s gift to his successor as he heads toward the exit.
ETF Trends: – Many investors don’t even understand how rising rates kill bonds. – Everyone seems to be obsessed with risks in the stock market and a potential correction after such a strong run so far in 2013. However, many investors are unaware of the grave risks that rising interest rates pose to their bond portfolios.
ETF Strategy: – Fixed income ETFs could amplify bond market volatility, says Fitch. – Exchange-traded funds (ETFs) are playing a more significant role in US fixed income markets, particularly the corporate high-yield segment, according to a recent report from Fitch Ratings, a credit rating agency.
Janney Capital: – Trials & tribulations of the municipal bond market. – A new period of “Trials and Tribulations” for municipal bond market investors has begun – from May 1 to June 24th – municipal benchmark yields experienced a “Lehman-like” move when they rocketed up 114 basis points.
U.S. News: – Sweet smelling junk: High-yield funds have had a strong showing. – Investors in bond mutual funds have not gotten much good news in recent months. Indeed, bruising outflows and negative returns are becoming the new normal as investors, worried about rising interest rates, increasingly turn their attention to the stock market.
Bloomberg: – Michigan scorned as schools pay 14 times AAA yield: Muni credit. – Investors’ insistence on a yield 14 times higher than the AAA benchmark on $92 million of Detroit school notes is the latest example of municipal-bond market contempt for Michigan after the city’s record bankruptcy.
Bloomberg: – Green bonds to top $9 billion on Buffett’s MidAmerican boost. – Green bond sales are set for a record year as investors in clean-power and climate projects seek long-term gains from the securities.
Daniel Zurbrügg: – A perfect storm coming for the muni market? – It looks like the next large bankruptcy in this area is just a matter of time. Detroit has been the biggest so far, but more might follow. This will cause investors in such bonds to reconsider the risk of such investments in comparison with other financial investments.
Gross: 3 to 4 percent credit growth can’t produce much more than 3-4 percent increases in asset prices. No more QE's? No more bull markets.
— PIMCO (@PIMCO) August 21, 2013
Crescenzi: Mortgage refi index plunging. Fed likely to be buying larger %age of new MBS after taper than in 1H ‘13. Taper terror overdone.
— PIMCO (@PIMCO) August 21, 2013
Kiesel: Existing home inventories up +29% in past 6 months. Price gains to moderate with higher rates & more supply. Re-model outlook strong
— PIMCO (@PIMCO) August 21, 2013