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Treasury yields haven’t been behaving as they should. In times of political and economic uncertainty, investors usually opt for the relative safety of government debt. During the government shutdown, 10 year Treasury yields fell as investors took shelter from the turmoil.
So when Congress finally got its act together this week to end the government debt ceiling crisis, many strategists thought yields would rise as the abating political uncertainty turned investor attention away from Treasuries and back toward riskier assets.
But Treasury yields moved in the opposite direction, surprising some analysts. Ben Eisen of MarketWatch says this is a sign that the debt ceiling debate simply masked a slowdown in economic growth.
There is growing concern that the underlying economy wasn’t doing all that great before the crisis hit. Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock said. “Since the end of the debt ceiling conflict, the focus has shifted in financial markets to what the economic implications would be. And it came at a time when the economy had been slowing down, when there was disappointment in what was at the time heightened expectations of better second half growth.”
All this means bond yields are set to stay low for the time being, at least until the new Fed Chairman Janet Yellen has had chance to put her feet under the desk. Many analysts are now saying there is no prospect of the Fed tapering until March next year.
In the meantime, the pause in the benchmark interest rate’s climb may present opportunities. BlackRock, for one, upgraded some of its interest-rate sensitive sectors, such as Treasury and agency bonds to neutral from underweight at the beginning of the month.
Daily Wealth: – Safe 8%-plus dividends in a zero-percent world. – Let’s face it, we live in a near-zero-percent world. Traditional income investments aren’t cutting it. Utility stocks, for example, currently pay their lowest dividend since the 2009 crash. And 10-year U.S. Treasurys pay just 2.7%. After inflation, you’re getting nothing. However, there is one investment that’s paying big yields.
MuniNetGuide: – Puerto Rico makes its case. – It’s fair to say that no other major issuer has been subject to greater credit scrutiny than the Commonwealth of Puerto Rico and its instrumentalities over the last few months. On Tuesday, under tremendous pressure from the market, the Commonwealth of Puerto Rico (PR) finally broke new grounds in its disclosure efforts: it held an informational webcast that was open to all investors, not just a few privileged institutional bondholders.
Bloomberg: – First Puerto Rico ETF still planned by Van Eck amid market flux. – Van Eck Associates Corp. is moving ahead with an exchange-traded fund focused on Puerto Rico and other U.S. territories, the first of its kind, even amid the biggest losses for the island’s securities since at least 1999.
Bloomberg: – U.S. muni bond fund outflows rise to $1.3 bln – Lipper. – U.S. municipal bond funds reported $1.3 billion of net outflows in the week ended Oct. 16, compared with $729.5 million in outflows the previous week, according to data released by Lipper on Thursday.
Learn Bonds: – Liquidity risk and the role it plays in your portfolio. – From an investor’s perspective, liquidity should be thought of as a risk factor. All else constant, an investor would prefer to hold liquid bonds over illiquid bonds, so investors must demand higher rates of return in exchange for liquidity risk. Just like other risk factors such as credit risk and term risk, the added risk cannot be justified without added compensation.
Harvard Business School: – Monetary policy drivers of bond and equity risks. – Given the importance of nominal bonds in investment portfolios, and in the design and execution of fiscal and monetary policy, financial economists and macroeconomists need to understand the determinants of nominal bond risks.
Reuters: – Foreign central banks scoop up Treasuries during debt ceiling fight. – Foreign central banks have been scooping up billions of dollars of U.S. Treasuries in the recent weeks despite the contentious fight in Washington over the budget and federal borrowing that had threatened a U.S. default.
BusinessWeek: – Treasury yields fall to lowest in week on bets Fed keeps buying. – Treasury 10-year note yields fell to the lowest level in more than a week on speculation the Federal Reserve will maintain its bond-buying program into next year after the government shutdown weighed on economic growth.
FT: – Corporate debt boom expected after U.S. budget resolution. – This month’s U.S. government shutdown also furloughed corporate debt issuance and now bankers expect a rebound in bond sales by companies.
Bloomberg: – Corporate bond sales in U.S. plunge 44% in week with shutdown. – Sales of corporate bonds in the U.S. plunged 44 percent as issuers avoided tapping the market with Congress wrestling over the government’s borrowing limit and a partial shutdown.
Bloomberg: – Buffett’s son calls junk bonds model for charities. – Howard Buffett, who runs a foundation with money from his billionaire father Warren Buffett, said high-yield debt is an inspiration for the right approach to philanthropy.
FT: – Renewed vigour for EMs favours Indonesian bonds. – The U.S. budget deal is done (well, kicked down the road in truth), while the Federal Reserve is now expected to extend its largesse to compensate for the economic damage caused by the government shutdown and political gridlock. Thus, with seasonal factors also likely to be supportive, many analysts see a window for more bullishness in which risk premiums will be reduced over the next few months. Which should be good news for emerging markets.
WSJ: – Investors turn to catastrophe bonds to boost returns. – Investors Seeking Increasingly Novel Ways to Boost Returns Amid Low-Yield Environment.
Artemis: – 2013 expected to beat catastrophe bond issuance record. – Munich Re, the world’s largest reinsurance firm, expects that issuance of catastrophe bonds and non-life insurance-linked securities in 2013 will beat the record volume issued set in 2007, according to its latest quarterly ILS market report.
FT: – ‘Periphery’ bank bonds are the comeback assets. – Weakened mid-tier banks in the eurozone “periphery” economies are widely seen as holding back the continent’s broader economic and financial market recovery.
USA Today: – Some new funds worth considering. – As long as you’re throwing out the bums in Congress — you are, right? — why not throw out some of your old, poorly performing mutual funds? Once you’ve done that, you can look at new funds, some of which are extremely promising.
MoneyBeat: – Morgan Stanley may ask who needs bonds when you have stocks? – Morgan Stanley’s equity trading revenue was one of several bright spots for the company in the third quarter, lifting results for its institutional securities arm despite a double-digit percentage slide in fixed income trading revenue.
Gross: #Treasury yields now in comfort zone. Not likely to move much near term.
— PIMCO (@PIMCO) October 18, 2013
REVISED: Potential muni volume for next week should total $8.25B, up from $4.39B this week, per Ipreo, The Bond Buyer and Thomson Reuters.
— James Ramage (@JamesRamage_BB) October 18, 2013
Collateral use/reuse is dramatically different when you're talking about reserves versus USTs. If you think it's the same you're wrong.
— David Schawel (@DavidSchawel) October 18, 2013