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The general consensus among many financial professionals is that bonds are dead and that investors should favor equities in 2014. It was backed up last week by a presentation by fund management group BlackRock, which showed the positioning of 13 big asset management companies. Every single one was overweight equities and underweight bonds.
Why have bonds fallen out of favor? Bonds have been in a bull market for the last 30 years, with prices rising as their inverse, yields, have fallen. In the case of 10-year Treasuries, prices have fallen from a peak of nearly 16% in 1981 to about 1.5% in late 2012.
Throughout this period many governments became far too heavily indebted, but central banks carried on buying bonds under quantitative easing programmes. But as economies start to recover and QE winds down, bonds are looking more and more exposed.
What happens next is anyones guess, “Most investment managers have no experience of managing money in anything other than a bond bull market,” says Olivier Zucker, a London-based adviser, told the Financial Times.
He went on to say, most of the models and concepts used by investors – from modern portfolio theory to behavioural finance – were framed during bonds’ boom years. “They are untested in the new world.”
His view is that a logical consequence of investors owning fewer bonds will be more volatility, both in individual portfolios and in markets generally. Yet market volatility tends to drive investors towards safe havens like Treasuries.
So the 30 year bull market for bonds may be over, but bonds may still yet have a part to play.
Delaware Online: – Are we sure our towns are not just going broke? – The State Budget Crisis Task Force declared last week that U.S. local governments remain beset by “fiscal instability,” and called for reforms to eliminate budgeting “gimmicks and short-term measures that obscure actual financial conditions” of states and cities.
Bloomberg: – Smart money wants mediocre BBB instead of top grade. – Investors are pouring the most money since September into the riskiest U.S. local debt, a boon to lower-rated issuers such as Puerto Rico that plan to borrow in the $3.7 trillion municipal market in coming weeks.
MarketWatch: – S&P capital IQ to explore municipal bond ETFs during its next “ETF analyst hour”. – JR Rieger of S&P Dow Jones Indices and Todd Rosenbluth of S&P Capital IQ will discuss the municipal bond industry and issues affecting municipal bond ETFs.
Zacks: – Market vectors launches high yield municipal bond ETF. – The year 2013 was pretty rough for municipal bonds as investors embraced equities over fixed income. Beyond low returns, the fiscal strength of many municipalities remains pretty weak, as bankruptcies in small California towns and the major city of Detroit had a dampening effect on the returns—and outlook– of the municipal bond market.
BizJournals: – Moody’s considers downgrading Jacksonville bonds. – Jacksonville’s municipal bonds have been placed on a 90-day review for a possible downgrade by Moody’s Investors Service, in part because of an increased focus on pension issues.
Brick By Brick: – What are municipal bonds? – When a local government needs to build a new toll road, school, or facility it borrows money. Specifically the local government raises the money by taking out a loan from the public (selling municipal bonds). As with any other loan there is a set amount that is borrowed, an interest rate is set, as well as a payback date.
LearnBonds: – Janet Yellen and a “true shift” in Fed policy. – In the January 20, 2014 issue of Time (magazine), Rana Foroohar shares details of an interview with Janet Yellen, the soon-to-be new chair of the Board of Governors of the Federal Reserve System. The article includes several tidbits worth discussing.
WSJ: – Next cut in Fed bond buys looms. – The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.
Reuters: – Investment grade firms face tough battle as yield fight rages. – High-quality European corporate credits will be forced to offer juicier premiums and longer maturities on new bonds in order to compete with higher yields available from weaker names.
ValueWalk: – HY corporate bonds running hot. – SocGen analysts Sebastien Lemaire and Laure Genet provide insights into European market sentiment through the medium of fund flows into and out of European ETFs in their research note ‘ETF Market Signals.’
FT: – ArcelorMittal’s early hybrid repayment sounds warning. – ArcelorMittal sounded a warning shot to investors in hybrid corporate bonds on Tuesday when it announced plans to repay $650m of high-yield debt less than 18 months after it was issued.
About.com: – The growing opportunity in short-term high yield bond ETFs. – Investors who are looking for ways to pick up yield without having to take on interest-rate risk now have more options than ever before. One such vehicle is short-term high-yield bond ETFs, which provide some shelter from rising long-term Treasury yields but still pay investors more than the 0.8% yields available on typical investment-grade short-term bond funds.
WSJ: – Emerging markets get ready for a bumpy ride. – IN 2013, THE world’s emerging markets had a case of the tapering blues. This year, the diagnosis is more complex.
Green Faucet: – Against the herd: Lower rates rather than higher rates in 2014. – Bloomberg News surveyed banks and securities companies on where the 10-year Treasury yield would finish 2014. Economist forecasts averaged 3.41%. With 2013 closing near 3.01%, perceived strength in the underlying U.S. economy, and the Federal Reserve reining in its controversial bond buying program (”QE3″), the predictions are hardly outlandish.
ETF Daily News: – AdvisorShares launches new low duration bond ETF. – Thanks to the QE taper and rising bond yields, many in the fixed income world have been hit hard. 2013 was the first year in quite some time that losses were seen in bond portfolios, leading some to abandon the space, or at least focus on lower duration securities.
Investment Europe: – Opportunity remains in fixed income, says Dexia’s Van Weyenberg. – Despite tapering fears there are still opportunities in bonds, says Ken Van Weyenberg, investment specialist at Dexia Asset Management.
Wall St Sector Selector: – Retailers, demand pull, and bonds. – On balance, it appears bonds may be due for a period of outperformance relative to stocks overall. The two most bombed out trades are fixed income and emerging market stocks.
James Picerno: – Global fixed income: Performance review. – Bonds have been widely scorned on the assumption that interest rates are set to rise for an extended period. Fair enough, but the world of fixed-income pulls in a lot of territory and so it’s a mistake to lump all corners of the planet’s bond markets into one lumpy blob.
Gross: “Give me a double shot,” global mkts said to its Fed & BOJ bartenders. Can we sober up on a single jigger of saké? I doubt it.
— PIMCO (@PIMCO) January 21, 2014
GROSS: Emerging Market currency instability suggests all is not right in this levered financial marketplace.
— PIMCO (@PIMCO) January 21, 2014
— David Schawel (@DavidSchawel) January 21, 2014