Predicting Bond Returns Over the Next Decade…Bond Sales Fall 62%…Don’t Fight The Last Investment War …and more!January 25th, 2013 by Simon G
Economist: – A stab at projecting investment returns over the next decade. – While trying to project future investment returns, the biggest mistake investors make is extrapolation. American pension funds often assume future annual returns of 7.5% or 8% because they have achieved those figures over the past 30 years. But the starting-point for such calculations is 1982, when Treasury-bond yields were in double digits and the dividend yield on US equities was 6.2%. Such returns are far harder to achieve when the starting yields on both assets are around 2%.
Bloomberg: – Bond sales fall 62% as foreign borrowers dominate dollar deals. – Sales of corporate bonds in the U.S. dropped 62 percent this week and relative yields narrowed as foreign borrowers dominated dollar-denominated issuance.
Abnormal Returns: – The end of the bond bull market and the dangers of fighting the last investment war. – The bond bull market has gone on, with the help of the world’s central bankers, longer than most anyone would have believed in 1980, 1990 or even 2000. However at a time of calm bond markets and supportive equity markets, investors have the chance to think ahead to how a sustained rise in interest would affect them and their portfolios.
Learn Bonds: – The amazing safety feature of saving bonds: Early redemption. – US Savings Bonds are different than other bonds, including Treasury Bonds. They can be redeemed at their full cash value prior to maturity, with only a minimal early redemption penalty. This feature means that holders of savings bonds have protections against interest rate moves and default risk that other bondholders do not.
MarketWatch: Soros says to watch for a spike in interest rates, and look to 1994 - The U.S. economy is picking up steam and the Fed’s quantitative-easing approach is helping, but investors should watch out for a possible spike in interest rates once growth is well under way, billionaire financier George Soros warned as he made the rounds at the World Economic Forum in Davos.
Felix Salmon: Cyprus now certain to default - Cypriot banks were loaded up to the gills with Greek debt, and Greek debt suffered a 70% haircut. Cyprus is tiny, and could never afford the €17 billion needed to bail out the banks and the government — especially since that would bring the country’s debt load up to more than 140% of GDP.
CNN Money: – Are emerging market bond funds a safe haven? – It’s widely accepted that at some point interest rates will rise and the value of bonds in the US will fall. Given that, do you think bond investors might find some fixed-income shelter in emerging market bond funds over the next five to 10 years?
ETF Trends: – Treasury ETFs Fall: ‘Great Rotation’ from bonds to stocks? – Bonds have enjoyed a bull run of more than three decades and yields have been pushed to near record lows in the aftermath of the financial crisis. However, rising interest rates would eat into bond prices and punish investors who have piled into fixed-income funds and ETFs.
Barron’s: – With target returns elusive, pension funds turn to private equity. – Think you’re having problems getting adequate income out of bond markets? Be thankful you’re not in charge of a big public pension fund. Such funds are having so much trouble hitting target returns by way of traditional investments that they’re increasingly turning toward alternatives like private equity.
Institutional Investor: – Catastrophe bond market stays strong despite Sandy. – Hurricane Sandy may have devastated the Jersey shore, but it didn’t in high-yielding catastrophe bonds. The market for natural disaster cat bonds; which property and casualty insurers issue to transfer risk just had its best year for new issuance since 2007.
The Telegraph: – Bank of America issues `bond crash’ alert on Fed tightening fears. – The US lender said investors face a treacherous moment as central banks start fretting about inflation and shift gears, threatening a surge in bond yields.
The Telegraph: – How far could bonds crash? – Many investors are concerned that a shakeout in the bond markets could hit their pension and investment funds. But few realize just how stark potential losses could be.
WSJ: – Yankee-bond issuers return to US debt market. – Foreign borrowers, known as “yankee” issuers, are flocking back to the US debt market, taking advantage of an opportunity to diversify their funding while investors are in a receptive mood.
Motley Fool: – Could this big winner really go even higher? – One of the most dangerous things you can do as an investor is to chase performance. But for those who’ve bought bonds despite low interest rates, performance-chasing has paid off extremely well, and at least one well-known money management company thinks that certain pockets of the bond market have even further to rise.
WSJ: – Disaster Bonds’ miss their mark. – Disaster-bond programs haven’t always helped communities that were battered the most. “The funds need to be targeted geographically to help the neediest places,” according to Robert Puentes, a Brookings Institution senior fellow.
Index Universe: – iShares plans maturing-corp-bond ETF. – iShares, the world’s biggest exchange-traded fund company by assets, looks to be planning an expansion of its presence in the relatively unexplored pocket of target-date maturity bond ETFs.
Bloomberg: – Illinois credit rating lowered by S&P as pension burden climbs. – Illinois had its debt rating cut one level to A- by Standard & Poor’s, which threatened to downgrade the state again following lawmakers’ failure to bolster the nation’s worst-funded pension system.
Gross: All Yen all of the time. Weaker Yen serves as new funding currency for risk trades. Enjoy it while it lasts.
— PIMCO (@PIMCO) January 25, 2013
It’s fair to point out that since QE infinity the S&P is up 10% yet the bond market pretty much refuses to budge
— David Schawel (@DavidSchawel) January 25, 2013
Saying leveraging up your portfolio is safe as long as you buy bonds, is just the type of talk you would expect at the end of a bond bubble.
— Stephen Gandel (@stephengandel) January 23, 2013