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Federal Reserve officials meet this week to decide on the fate of their $85 billion a month monetary stimulus program, with most analysts agreeing that a tapering of the program is more than likely.
But PIMCO’s Mohamed El-Erian has warned, in an article for CNN Money, that any taper should be limited.
El-Erian said: “Given the realities of the tepid economy and the range of policy uncertainties (including for other countries, especially in the emerging world), the Fed would be well advised to start small – e.g., a $10-$15 billion reduction in monthly purchases,”
Whilst El-Erian’s remarks are in line with a number of other economists. He went a step further, by calling on the Fed to focus the reduction disproportionately on U.S. Treasurys. Favoring the buying of mortgage-backed securities to “support a housing market that is already showing some early signs of weakening.”
Currently the Fed’s $85 billion a month monetary stimulus program is made up of $40 billion worth of mortgage-backed securities and $45 billion of longer-term Treasurys. El-Erian’s proposal would see U.S. Treasury purchases reduced to $30 to $35 billion a month.
Todays Other Top Stories
Bloomberg: – Gross’s trade sours as bonds lose faith in Fed guidance. – Bond investors are losing confidence in the Federal Reserve’s pledge to keep benchmark interest rates at about zero into 2015 as the U.S. economy accelerates.
Learn Bonds: – Want income? You can find it here. – Income-focused investors may be interested in the junior subordinated debt of PPL Corp. Through its financing subsidiary, PPL Capital Funding, issued $400 million of junior subordinated exchange-traded debt earlier this year. It trades under the ticker PPX and is “fully and unconditionally guaranteed as to payment of principal, interest and any premium under the subordinated guarantees” by PPL Corporation.
FT: – Corporate bonds vulnerable to renewed EM sell off. – Emerging markets have regained some poise after a foul summer. Signs of economic stabilisation in the developed world come just as weaker than expected US jobs data have cast doubt on the pace of likely Federal Reserve tapering, and bargain-hungry fund managers are helping trigger a recovery across most markets.
Zacks: – A Great bond ETF for rising rates. – The fixed income world has experienced a huge broad sell-off in the past few months as interest rates continue to rise amid higher chances of the Fed curbing its stimulus soon.
FT: – Sting of Verizon bond lies in long-term tail. – Long-dated debt has biggest risk in rising rate environment.
MarketWatch: – Junk bonds are near the top in performance since Lehman folded. – It’s been five years since Lehman Brothers filed for bankruptcy, effectively marking the start of the Great Recession from which we are still emerging. That’s as good a time as any to size up how well global markets have recovered.
ETF Trends: – ETFs Aren’t to blame for high-yield sell-off. – BlackRock (NYSE: BLK), the world’s largest asset manager and the parent company of iShares, the world’s largest ETF sponsor, maintains that ETFs did not make the June junk bond sell-off worse.
FT: – U.S. bond investors expect Fed to announce small ‘taper’. – U.S. bond investors expect a modest reduction in bond purchases this week as the Federal Reserve gears up for a fateful decision on whether to slow its third round of quantitative easing.
Herald Tribune: – Do Treasury inflation-indexed securities make sense today? – Treasury Inflation-Protected securities, more commonly called TIPS, are complex securities backed by the “full faith and credit” of the U.S. government. As their name suggests, they offer investors protection against rising prices. Before analyzing if TIPS make as much sense today, let’s examine how these bonds work to protect against inflation as measured by the consumer price index.
Detroit Free Press: – How Detroit went broke: The answers may surprise you – and don’t blame Coleman Young. – Detroit is broke, but it didn’t have to be. An in-depth Free Press analysis of the city’s financial history back to the 1950s shows that its elected officials and others charged with managing its finances repeatedly failed — or refused — to make the tough economic and political decisions that might have saved the city from financial ruin.
Bloomberg: – Refinancings plummet after worst losses in 14 years. – U.S. localities are scaling back refinancing by the most since 2006 as the worst municipal bond losses in 14 years push up borrowing costs.
Your Wealth Effect: – Are bonds facing a popularity crisis or a liquidity crisis. – There are three main investment fears that can cause the price of a corporate bond to fall. Fear that the company behind the bond may not be able to keep up with their interest payments and Does the company have enough sales/profits to keep the interest payments flowing? But which is worse and why?
Bloomberg: – Genesee county offering biggest Michigan muni deal since detroit. – Michigan’s Genesee County plans to offer $53 million of revenue bonds today, the biggest long-term debt sale in the state since Detroit filed a record U.S. municipal bankruptcy on July 18.
Morningstar: – Bonds and shares both in the red in August. – Following July’s sizeable rally in riskier assets, investors had to contend with a broadening range of potentially damaging issues in August as the “wall of worry” returned.
Income Investing: – BlackRock: Expect ‘tapering lite’; Look to junk bonds. – We’re coming up on 48 hours until the Federal Reserve’s post-meeting announcement, when markets expect the Fed to start winding down its $85 billion bond-buying program. Without any specifics from the Fed, strategists have come up with $10-$15 billion as the consensus figure for cuts they expect to see. In that camp is Russ Koesterich, BlackRock’s global chief investment strategist.
Forbes: – A tale of two bond deals: Apple, Verizon show the voracious appetite for yield. – Two companies have come to market with record-breaking corporate bond deals this year and their reasons for doing so are vastly different. But there is a common thread between this week’s $49 billion, eight-tranche offering from Verizon Communications and May’s $17 billion six-tranche deal from Apple a continuing hunger for incremental yield in a world of low interest rates.
Gross: Summers's exit makes Monday a huge day for curve/risk on trades. Treasury 5/30 curve may steepen by 10. Stocks should do very well.
— PIMCO (@PIMCO) September 15, 2013
— PIMCO (@PIMCO) September 16, 2013
— David Schawel (@DavidSchawel) September 16, 2013