This Week’s Top Bond Market Stories – December 14th Edition

December 14th, 2013 by

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Learn Bonds

Learn Bonds: – Preferred Stocks: Better than bonds but act just like them. – With bond yields struggling, investors might be wondering if the bond market is no longer a place to put all their fixed income investment dollars. Fortunately, there is an alternative that doesn’t get much coverage in the financial press that provides diversification with bond-like regular income along with the possibility of capital gains.

Learn Bonds: – How changing demographics are affecting the bond market. – We believe that changing demographics could create economic headwinds for as many decades as they provided tailwinds. This is not a pessimistic view, it is just reality. However, this does not mean that the U.S. economy will not grow, nor does it mean that equity markets will not perform well.

Learn Bonds: – The ABCs of BDCs. – Last week we discussed the basics of the high-yield bond market and how risk-tolerant investors might consider the space as a source for elevated income. This week I’d like to draw your attention to the business development company, or BDC, a rather niche corner of the equity market where income investors can find high yield.

Learn Bonds: – How to start investing in consumer loans – Building your portfolio. – Consumer loans offer investors the opportunity to own notes (that are paid based on the cash flow from the underlying loan) with interest rates ranging from 6.03 to 26.06 percent. The process of investing in notes is very different from buying stocks or mutual funds. This article takes an in-depth look at the investment process with Lending Club, the leading marketplace for consumer credit. When investing in notes, there are some important concepts to keep in mind.

Learn Bonds: – When investing play the hands you are dealt. – In recent weeks, I’ve written a series of articles outlining various asset-allocation models. The models were geared toward investors nearing retirement with $1 million to invest. Of course, concerning asset allocations, there are countless variations investors can create.  Investment objectives, time horizons, and risk tolerances will help shape allocations. Additionally, the market environment in which we live will also play a role in shaping allocations. As I mentioned in, “A Conservative Asset Allocation For Income-Focused Investors”.

 

Municipal Bonds

Investment News: – Muni market beware: Puerto Rico running out of time. – As if fears over rising interest rates and months of mass selling weren’t enough of a head wind for municipal bond investors, Puerto Rico now appears to be running out of time to get its fiscal house in order. The commonwealth was put on review by another major ratings agency, paving the way to what could be a shock to the municipal bond market.

MyMoneyBlog: – Picking municipal bond funds & the importance of low fees. – Due to a lack of tax-deferred space, my current tax bracket, and the current interest rate spread over US Treasury bonds, I started investing part of my portfolio in Vanguard’s tax-exempt municipal bond funds. As a result, I try to read every single muni bond article that Vanguard puts out. In this month’s blog post Municipal debt, Detroit, and diversification, one of the topics covered was the importance of minimizing fund fees.

Institutional Investor: – Analysts say now is the time to buy municipal bonds. – Trepidation over quantitative easing and cities insolvency has led to depressed muni bond prices and bargains now.

Bloomberg: – Puerto Rico may be cut to junk by Moody’s on weak economy. – Puerto Rico’s general-obligation debt, already graded one step above junk, may be cut by Moody’s Investors Service if the commonwealth’s finances continue to deteriorate and it isn’t able to access credit markets soon.

BusinessWeek: – Volcker rule shift lets banks continue muni bond speculation. – U.S. financial regulations that curb banks’ ability to speculate with their own money included an exemption for the $3.7 trillion municipal bond market after issuers complained the rules could increase borrowing costs.

Wealth Management: – U.S. Muni bond market contracts by most ever. – The U.S. municipal bond market shrank at a record pace in the third quarter, and the amount of bonds held by households, the market’s biggest investors, fell to the lowest level in nearly seven years, according to Federal Reserve data released on Monday.

Napa Net: – Failure to disclose pension liabilities makes muni bonds risky. – While it’s interesting to read about the pension crises of many well-known states and municipalities, including Detroit, Illinois, Chicago and Stockton, and how they might affect current and former workers, it’s important to understand that the results of unfunded pensions may harm investors. Muni bonds seem safe because the issuer is a political entity, but, according to an article by New York Times columnist Gretchen Morgenson, disclosure rules and oversight may be less stringent than with other investments, making muni bonds more risky.

About.com: – Municipal Bonds 2014 Outlook. – The bond market performed poorly in 2013, but there were still plenty of places investors could have made money: High yield bonds, senior loans, and short-term bonds, to name three. The outlook again points to a year of continued volatility and muted gains in 2014, but this time municipal bonds may well be the asset class that stands out from the pack.

News and Tribune: – Kentucky bond ratings come back from agencies. – Bonds that will be sold to help finance Kentucky’s portion of the Ohio River Bridges Project were rated just above junk status.

NewsLanc: – Why should investments in municipal bonds differ from corporate bonds? – Let those who invest municipal bonds take the same caution as those investing in corporate bonds. Let them understand that if worse comes to worse the municipality or public authority can and will enter bankruptcy procedures and the court will endeavor to reach a remedy that is fair to all parties.

 

Treasury Bonds

Bloomberg: – Treasuries fluctuate amid speculation Fed will slow bond buying. – Treasuries fluctuated as data indicating the world’s biggest economy is accelerating overshadowed a report that wholesale prices unexpectedly declined in November amid speculation the Federal Reserve may reduce bond purchases as soon as next week.

ETF Trends: – Cash rushes out of Treasury ETFs. – Government bond mutual funds are seeing record outflows after speculation on Fed tapering sent investors running, while alternative fixed-income exchange traded funds have been thrown into the limelight.

WSJ: – Bill Gross’s Treasury holdings fall in November. – Bill Gross, who runs the world’s biggest bond fund, slightly dialed back exposure to U.S. Treasury bonds in November after increasing the holdings for two straight months. Mr. Gross’s cash allocation to Treasury bond holdings ticked down to 37% at the end of last month compared with 38% in October.

See It Market: – 10 year Treasury note: Yield analysis and correlations into 2014. – The jittery bond market has been on edge for the last seven months as rising interest rates have put a lid on nearly every sector except floating rate notes and high yield.  The threat of the Federal Reserve putting an end to its latest round of quantitative easing has pushed the 10 Year Treasury Note yield back above 2.8%.  It’s yield is once again drifting towards the high of 3.0% that we witnessed back in September.

WSJ: – Treasury bonds hurt by jobs data; 10-Yr yield above 2.9%. – U.S. Treasury bonds sold off as the latest employment report heightened concerns the Federal Reserve may pull back its monetary stimulus as soon as this month.

 

Investment Grade Bonds

Financial Post: – Investors need to be picky when it comes to corporate bonds. – Corporate bonds in Canada and the U.S. should continue to be a main fixed-income holding in 2014, but investors will need to be far more selective with their picks in order to maximize returns.

Business Week: – JPMorgan sees bulls in high-grade debt. – Investors surveyed by JPMorgan Chase & Co. are the most bullish on investment-grade bonds in more than nine years as they demand the least relative yields since the start of the financial crisis. Arch Coal Inc. plans to raise $300 million in a private offering of secured notes.

 

High-Yield

FT: – Investors up on junk bond see-saw for now. – Consensus is clear: Growth will continue next year, but not so fast that it tests central banks’ commitments to keep rates low for longer. The belief which follows is that shares keep going up, but more slowly, while bonds will go down (and yields rise).

Forbes: – Retail cash inflows to high yield mutual funds wipe out ETF outflows, positive return. – Retail cash flows to high-yield funds returned to positive territory with a net inflow of $16 million for the week ended Dec. 11, according to Lipper, a division of Thomson Reuters. An inflow of $108 million to mutual funds outweighed an outflow of $92 million from exchange-traded funds.

Income Investing: – Junk-bond returns top 7% for 2013. – 2013 will be remembered as a pretty terrible year for bonds in general, with the exception of one category:  junk bonds. The average return across the high-yield market in 2013 to date just topped 7%, reaching 7.07%, per the latest reading on the Bank of America Merrill Lynch High Yield Master II Index.

IndexUniverse: – Clark: Pivoting between TLT and HYG. – This article is part of a regular series of thought-leadership pieces from some of the more-influential ETF strategists in the money management industry. Today’s article features K. Sean Clark, CFA, chief investment officer of Philadelphia-based Clark Capital Management.

Zero Hedge: – As credit bubble grows, junk bond underwriting fees drop to record low. – Record sales of high-yield payment-in-kind bonds are triggering uneasiness among international regulators concerned that investors may suffer losses when central banks tighten monetary policy.

ETF Trends: – Junk bond ETFs rise, defaults decline in November. – There are two primary risk elements involved with bond investing – rate risk and credit risk. Interest rate risk came into focus in the second quarter amid increased speculation about when the Federal Reserve could begin tapering its quantitative easing program.

 

Emerging Markets

Citywire Money: – JPM’s Stealey exits local currency emerging market bonds. – Bond manager cuts exposure after recent rally but believes long-term fundamentals remain in place.

Morningstar: – The 4 flavors of emerging-markets bond funds. – Many managers focus on currency denomination or corporate debt, while others are beginning to take a total-return approach.

BBR: – Market vectors unveils emerging markets aggregate bond ETF. – Market Vectors ETFs has rolled out its latest ETF, Market Vectors Emerging Markets Aggregate Bond ETF (EMAG), which offers the most comprehensive exposure to emerging markets bonds.

Forbes: – How to view emerging markets now. – Although the sector has lost momentum, there’s no reason why the individual investor should bail out.

Reuters: – DoubleLine’s Gundlach says favors emerging market debt over junk bonds. – Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital LP, said on a company webcast on Tuesday that he favored dollar-denominated emerging market bonds over U.S. high-yield bonds.

FT: – The emerging risks of ticking time bonds. – The most sobering lesson of the global financial crisis was that developments expected to increase resilience – in that case, the “originate and distribute” model of finance – turned out to reduce it. Does a similar danger now threaten stability? Yes. The next round of global illiquidity might derive from foreign currency bonds of non-financial companies of emerging economies. The centre would be asset managers, not banks.

Reuters: – Banks’ taper rehearsal gives emerging markets hope. – The banking industry’s dress rehearsal for tapering by the Federal Reserve has given emerging markets hope. Fears that the U.S. central bank could start unwinding its money-printing programme began to roil emerging markets in May. But by the end of June, foreign bank lending to all developing countries had fallen by just 2 percent from a record-high $5 trillion at the end of March.

ETF Trends: – Three countries could pressure EM bond ETFs. – Emerging market bonds exchange traded funds have exploded in recent years, attracting billions as investors sought new sources of yield. However, vulnerable currencies and small markets in some developing countries could put pressure on the broader bond funds.

 

Catastrophe Bonds

Artemis: – EIOPA highlights concerns on ILS and catastrophe bonds. – You know a sector is gaining traction, experiencing growth, rising in profile and becoming more mainstream when the regulators express an interest. In 2013 it has been the turn of insurance-linked securities (ILS), catastrophe bonds and alternative reinsurance capital.

Reuters: – EU insurance watchdog highlights “cat” bond market risks. – A surge of new capital from investors like pension funds into the market for specialised insurance risks could threaten financial systems and needs to be closely watched, the European Union insurance watchdog EIOPA said on Thursday.

Artemis: – Growing cat bond market a credit negative for reinsurers. – The growing size of the catastrophe bond market, which at around $20 billion of risk capital outstanding has reached its largest size ever, is a credit negative factor the outlook of reinsurers, according to a report from ratings agency Moody’s.

Artemis: – Pine River sees fixed income opportunities in ILS and reinsurance. – Increasing volumes of capital will likely come into the insurance-linked securities (ILS) and reinsurance marketplace from large institutional asset managers and fixed income hedge funds. Pine River Capital Management is one such fund, which shows a growing interest in reinsurance.

 

Bond Funds

StarTribune: – Investors are moving into stocks and away from some bonds, flipping years of behavior. – After years of sticking with plain-vanilla bond funds, investors are starting to turn their backs on them and opt for stocks instead. The move isn’t big enough to be the “great rotation” from bonds to stocks that many experts predicted — it’s more of a good rotation — but fund managers say more is on the way.

ETF Trends: – Some new ETFs are off to fast starts. – Roughly 140 exchange traded funds and exchange traded notes (ETNs) have come to market this year. As is the case with any year’s crop of new ETFs, some are off to faster starts than others.

Financial Advisor: – U.S. mutual funds hit investors with big capital gains. – Capital gains pain has arrived for U.S. mutual fund investors. U.S. mutual funds are disclosing some whopper capital gains distributions, anywhere from 6 percent to 60 percent of net asset value, underscoring stock market success and a potential year-end tax headache for investors. The year-end distributions are among the largest seen since the start of the financial crisis in 2008, according to U.S. regulatory filings.

WSJ: – Long-term mutual fund outflows $1.59 billion in latest week. – Long-term mutual funds posted estimated outflows of $1.59 billion in the latest week as investors pulled money from bond and U.S. equity funds, according to the Investment Company Institute.

About.com: – 2014 bond market outlook. – While the bond market as a whole is unlikely to deliver much in the way of total return in 2014, there’s also no reason to hit the panic button. Here, we look at the various issues that could impact market performance in the year ahead.

BusinessWeek: – Dan Fuss joins Bill Gross shunning long-term debt before taper. – Dan Fuss is joining Bill Gross in shunning long-term debt before the Federal Reserve starts tapering its bond purchases.

Financial Post: – Bond ETFs bring more diversity to fixed income strategies. – When interest rates start to rise, bonds tend to fall out of favour with investors, especially those holding a large portion of low-yield assets in their portfolios. While diversification is often effective in managing market changes, this approach has been a challenge when working with individual bond holdings.

Citywire: – Investec’s Eerdmans: Taper delay was to ‘teach market a lesson’. – Investec co-head of Emerging Market Fixed Income Peter Eerdmans believes markets are overpricing the risk of an interest rate rise in emerging economies next year and that the US Federal Reserve was ‘teaching the market a lesson’ when it decided not to taper three months ago.

The Telegraph: – Why the ‘Great Rotation’ from bonds to equities never took off. – What has become clear this year and will continue to be so in 2014 is that the choice between stocks and bonds is not an either-or decision.

BusinessWeek: – Gross unheeded by Japan seeing disinflation buoying bonds. – Honed by 15 years of falling consumer prices that burnished the appeal of fixed-income assets in Japan, the Asian nation’s bond buyers are amassing long-term Treasuries as disinflation emerges in the U.S.

 

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