TIPS Not as Safe as You Think They Are

TIPS Not as Safe as You Think They Are…Bond Bigwigs Cut Back on Junk…Can Fixed Income Be Regulated?…and more!

February 28th, 2013 by Simon G

ETF Trends: – TIPS ETFs: Watch out if rates rise faster than inflation. – Many individual investors purchase TIPS in the belief that they are as safe as safe can be: The full faith and credit of the US government stands behind them, and their returns adjust to keep up with inflation. But here’s a fact that some may find surprising, if interest rates move up faster than consumer prices do, their TIPS investments can turn around and bite them.

Barron’s: – Bond bigwigs cut back on junk holdings. – The junk bond market has stagnated this month after recording some outrageous gains through much of January, which came after the asset class had already returned 15.6% in 2012. Many market watchers still think that in this environment, as long as you’re buying bonds, you still might as well buy the highest-yielding ones, but other pundits are starting to question the longer-term outlook for junk bonds.

Cate Long: – Can fixed income be regulated? – The SEC has announced that it will hold a Fixed Income Roundtable on April 16 in Washington to discuss improving the transparency and efficiency of fixed income markets. This news is welcome and long overdue. But will fixed income markets ever have the same market structure as equities?

Learn Bonds: – Bernanke’s testimony and the Fed’s exit strategy. – On Tuesday, when Bernanke was asked about selling a big portion of the securities the Fed has purchased in recent years in order to wind down the Fed’s balance sheet, the Chairman responded, “We don’t anticipate having to do that.” He continued, “We could exit without ever selling.” So what are the chances that this is the strategy that will play out?

Governing: – Muni bond tax exemption repeal could spike borrowing costs by 50%. – Total borrowing costs for cities, counties and states could increase by more than 50 percent if the tax-exempt status of municipal bonds is repealed as part of the ongoing budget talks on Capitol Hill, a new report has found.

MarketWatch: – Treasurys quit 5-session win streak as yields rise. – Treasurys reversed lower on Tuesday, quitting a five-session win streak, as Federal Reserve Chairman Ben Bernanke concluded his two-day testimony before Congress, fears about Italy’s political situation eased, and stocks extended a strong rally into a second day.

Globe and Mail: – How to diversify your fixed income beyond government bonds. – While the equity tap has been turned on, at least south of the border, many in the industry here say a large group of investors are still too wary to take the plunge. The trick for those who are sticking to fixed-income investments, the experts say, is to look beyond what they know – government bonds – and move into fixed-income alternatives with better yields.

Barron’s: – Junk bonds could See 1.4% annual returns through 2016. – Longtime junk bond guru Martin Fridson, who had grown pretty bearish on the asset class during its recent run-up, sounds another warning this week: junk bonds could return just 1.4% a year through 2016, and “something extraordinary would have to happen” for the high yield market to earn its average coupon (currently 5.84%, down from 6.11% at the end of 2012) over the next four years.

Reuters: – US municipal bond trading dipped in 2012. – Trading in U.S. municipal bonds dipped last year as appetite for revenue bonds faded for a second year in a row, according to data released on Thursday by the Municipal Securities Rulemaking Board.

Vanguard: – Vanguard to add emerging markets bond index fund. – If you’re looking to add government bonds from emerging markets to your portfolio, consider Vanguard Emerging Markets Government Bond Index Fund. The US Securities and Exchange Commission is reviewing a registration statement filed for the fund, which we expect to offer by the end of the second quarter of 2013.

ETF Trends: – Is the high-yield bond ETF rally really over? – Some investors are beginning to move away from high-yield, speculative-grade, “junk” bonds and related exchange traded funds after an impressive four year run. The outflows have been a relative trickle so far, but some investors are worried about how rising interest rates would impact all fixed-income funds, including high-yield corporate bond ETFs.

Reuters: – Bond managers fret junk bond rally is losing steam. – There may be no such thing as a sure bet on Wall Street, but junk bonds have come pretty close over the past four years. Now the high-yield market feels frothy enough to a number of the biggest bond market players that they are shying away from junk.

Chicago Tribune: – Cities and Counties say US municipal bond tax changes would cost them billions. – Changes to the federal tax treatment of U.S. municipal bonds could cost state and local governments tens of billions of dollars per year, cities and counties warned on Wednesday as they escalated their fight to defend the bonds’ tax exemption.

MSRB: – MSRB publishes 2012 municipal bond fact book. – The Municipal Securities Rulemaking Board (MSRB) has published the 2012 edition of its fact book, an online sourcebook that analyzes trading data and other statistics for the $3.7 trillion municipal bond market.

Barron’s: – First trust launches junk-bond fund that’s also short Treasuries. – Build a yield-rich fund and insulate it from some of the negative effects of a sudden Federal Reserve interest-rate move: Sounds promising, doesn’t it? First Trust today became the first of what will probably be several exchange-traded fund companies launching an ETF in this vein.

https://twitter.com/PIMCO/status/307192163853283329

#Sequester will have limited impact to #muni bond market. $5.8 bln cut in Fed aid to states amounts to approx .35% of total state spending.

— AnthonyValeri (@Anthony_Valeri) February 28, 2013