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U.S. Treasury bond prices fell on Friday, pushing the yield on 10-year notes above the key 3% threshold, a move which sent ripples through the U.S. economy and global financial markets.
The US 10-year note yield is a benchmark for all types of interest rate securities ranging from mortgages to corporate bonds, and highly influences the cost of fixed rate housing loans for American homeowners.
The 10-year yield briefly climbed above the 3% threshold on Thursday rising to 3.007% before falling back to 2.99% later in the session. This piled more pressure on Treasurys which have had a torrid 2013. The Barclays index for long-term U.S. Treasury bonds has fallen by 12.2% this year as the 10-year yield has risen from 1.80 per cent since January.
Yields on the 10-year note have been steadily rising since the Fed announced earlier this month that it will start to taper the amount of bonds it purchases as part of its monetary stimulus plan. The 10-year yield has risen from 2.8% since the middle of December, with some analysts saying it could reach as high as 3.5% within the next few months.
But the recent rise in yields is in contrast to the rise seen in September, when there were rumors about the Fed tapering its asset purchases. Then, the market was pricing in aggressive rate rises, with the December 2015 federal funds contract (the central banks overnight borrowing rate) climbing to 1.5%. This time around the contract has risen to just 0.75%. A move which is seen as validating the Feds decision.
All this is seen as positive for the bond markets. Jonathan Lewis, chief investment officer at Samson Capital Advisors, told the WSJ. “The bond market is very attractive now compared to its valuation at the start of 2013 and it is an opportune time to rebalance and bring their asset allocation back in alignment,” he said.
Treasury yields are unlikely to climb much beyond the 3.0% level according to some traders. Tame inflation is likely to keep a lid on rising bond yields. The Fed has cited contained inflation pressures as a reason to continue to keep the short-term policy rate near zero even as it is ready to dial back its bond purchases. Several inflation gauges monitored by the central bank have remained below the Fed’s 2% target.
WSJ: – Municipal bonds wrap up tough year. – Municipal bonds are on track to post their worst annual performance in nearly two decades as 2013 ushered in more financial woes for U.S. cities. Municipal debt is down 2.58% so far this year after handing investors a 6.78% return in 2012 and a 10.70% return in 2011, according to Barclays municipal-bond index.
Bond Buyer: – Outlook 2014: Municipal advisor regulation to dominate 2014. – Municipal advisor regulations are likely to be the focus of intense debate in 2014, as the Municipal Securities Rulemaking Board labors to release rules and broker-dealer groups continue to push for interpretations favorable to underwriters.
Seeking Alpha: – State of California municipal bond risk: A year-end update. – As we have noted in prior municipal bond analyses, the credit default swap market is often quoted as the source of credit risk information. In this note, we again turn to the municipal bond market and actual traded prices to analyze the market view of the credit risk of the State of California.
BusinessWeek: – Dirt bonds lead market in 2013 as housing rebounds. – Municipal debt tied to real-estate development is set to be the best-performing part of the $3.7 trillion state and local-bond market this year as an improving housing market boosts the securities’ earnings.
Cate Long: – Muniland’s ‘Best of 2013’. – 2013 was a pivotal year for municipal bonds. Here’s Cate Long with a round-up of the Good the Bad and the Ugly of muniland.
Bloomberg: – California topples New York to reclaim sales crown. – California is poised to reclaim its spot as the biggest borrower in the municipal market after an improving budget outlook propelled the state’s debt in a year when taxes rose for its wealthiest residents.
Bloomberg: – Boeing 777X exit threat leaves Washington facing bond-rating cut. – Washington faces a credit downgrade, higher borrowing costs and the loss of jobs and tax revenue should Boeing Co. (BA) decide to move production of its new 777X jetliner to another state.
LearnBonds: – Short-term bonds vs. money market. – Currently, one of the drawbacks to money market funds is a nearly nonexistent rate of return. In order to increase the returns on their investments, many investors are turning to short-term bond funds as a solution. Short-term bond funds, due to their higher rate of risk, are not a replacement for money market funds, but can be an excellent supplement and alternative option for investors.
WSJ: – With rising rates, corp debt may hit a ‘maturity wall’. – Thanks to the Federal Reserve’s policy of keeping interest rates pinned to the floor while it buys $85 billion of bonds a month, corporate debt issuers have never had it so easy. Debt issuance, in fact, had already set a yearly record by early December. Debt of all types has flourished, and companies have been able to get creative. Junk bonds, leveraged loans, “covenant light” bonds and even “PIK” bonds have all made a return. But today’s debt wave could hit an ugly wall down the road as rates rise. “You have the makings of a default cycle that could be really significant,” according to James Gellert, CEO of independent ratings firm Rapid Ratings.
Zacks: – HYLD: The best choice among high yield bond ETFs? – The year 2013 can easily be earmarked as a year of the beginning of the ‘great rotation’ – from bonds to stocks – aided by improving economic conditions especially on the domestic front made it clear that rock-bottom interest rate environment prevailing in the U.S. would not last long. If this was not enough, heightened concerns related to the scaling back of the monetary easing policies by the Fed have made overall bond investing lose its luster.
Zacks: – WisdomTree launches two high yield bond ETFs. – Bond investments have hardly seen gains in 2013 thanks to taper concerns. However, across the spectrum, the high-yield bond space has been less ruffled, with most losing marginally in the YTD frame.
Forbes: – Interesting JNK put and call options for February 2014. – Investors in SPDR Barclays High Yield Bond ETF saw new options become available this week, for the February 2014 expiration.
ETF Trends: – Goldman’s discouraging view of emerging markets. – Goldman Sachs cautioned investors not to set their hopes too high for developing world equities or bonds in 2014. In a report titled “Emerging Markets: As the Tide Goes Out,” Goldman advised that investors with a “moderate” tolerance for risk reduce their exposure by one-third, from 9 percent to 6 percent of overall portfolios.
Wealth Management: – Emerging market debt’s wild ride. – In the current low-yield environment, EMD funds have been exceedingly popular. They’ve been some of the top-performing investments in the fixed income sector over the past three and five years. The past year, however, has been a rough patch. Still, there are standout portfolios that have wrested positive returns from this very volatile market over the past 12 months.
Business Wire: – Emerging Markets bonds hold pockets of value following sell off driven by taper expectations, says market vectors’ Fran Rodilosso. – With the Federal Reserve’s (the “Fed”) decision to begin its “tapering”, the initial steps of this process could likely cause some bond buyers to dial back their risk profiles, according to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs.
JP Morgan: – J.P. Morgan Funds: Tapering on its own is meaningless to emerging markets. – The act of “tapering” Quantitative Easing has not negatively affected emerging markets (EM), but rather expectations of U.S. short-term rate increases have disrupted the asset class.
Finchannel: – Record high for outstanding CAT bonds; demand to continue. – The FINANCIAL — As investor demand has continued to grow for catastrophe bonds (CAT), sponsors have been able to offer deals at considerably lower coupon rates and with increasingly favorable structures that suit individual company needs, according to Fitch ratings . As deals have leaned further in favor of sponsors, continued strong demand for a diversifying set of risks remains the key driver of the thriving CAT bond market.
Artemis: – Investor demand for catastrophe bonds to remain strong in 2014: Fitch. – After a bumper 2013 of issuance in the catastrophe bond market, with the volume issued reaching the second highest level ever recorded, investor demand for cat bonds is expected to remain strong in 2014, according to Fitch Ratings.
Aleph Blog: – What are safe assets? – At a time like this, where can your assets be safe? Bond interest rates are low, and don’t reflect the risks. Stocks have high valuations, and I invest in the few stocks with low valuations. The alternative is to earn nothing in cash. At present, that is the safest option, and may return the best over the next year.
About.com: – 2013 ETF flows reveal bond investors’ costly education. – One unfortunate outcome of 2013′s bond market downturn is that many investors learned about interest-rate risk the hard way. After a 32-year bull market in bonds, some investors may have lacked a full understanding just how specific investments would be hurt by rising yields.
FT: – Outlook for U.S. bonds clouded by taper trajectory. – After enduring their first negative year in more than a decade, US bond investors face further challenges in 2014 as the Federal Reserve starts retreating from its era of easy money.
Baltimore Business Journal: – Legg Mason well-poised to take advantage of interest rates, investor trends. – Legg Mason CEO Joseph A. Sullivan says bond fund managers at Legg’s Western Asset and Brandywine Global affiliates are poised to navigate a period of rising rates. They are adept at managing credit risk and can spread their investments across different countries in a “go-anywhere” strategy.
ETF Trends: – Don’t fear the Fed with these bond ETFs. – The Federal Reserve gave financial markets an early holiday treat, so to speak, by making official plans to begin tapering its quantitative easing program in January.
IndexUniverse: – 5 Most popular bond ETFs of 2013. – In a year where long-dated Treasury bond funds were largely out of favor due to prospects for higher interest rates ahead, it’s no surprise that ETFs tapping into other pockets of the bond market shined at the expense of the more traditional Treasury exposure.
Cumberland Advisors: – Build America Bonds: A year in review. – Like most fixed-income assets, BABs were cautiously scrutinized by investors in 2013, particularly during the first quarter. But how were BABs spreads impacted by the events of 2013?
— PIMCO (@PIMCO) December 27, 2013
Gross: HoHoHo! Who cant like a ~25% gain in 2013? Only a Grinch who worries abt record profit margins, corp buybacks &Fed checkwriting. Moi?
— PIMCO (@PIMCO) December 25, 2013
Bonds starting to look pretty attractive against Bunds
— David Schawel (@DavidSchawel) December 27, 2013