This Week’s Top Bond Market Stories – December 7th Edition

December 7th, 2013 by

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Learn Bonds

Learn Bonds: – All about convertible bonds. – If you’ve ever come across the term ‘convertible bond” and been perplexed by it, don’t feel badly.  I didn’t have a clue as to what they were until many years into my investing life.  They are a very intriguing asset class deserving of attention for your long term bond portfolio.

Learn Bonds: – The Fed tapering playbook – Bill Gross style. – Bill Gross, Manager of PIMCO’s Total Return Fund, believes that short-term Treasury yields will remain the same despite Fed tapering. In other words, the nation’s most prominent bond investor believes that Fed tapering will have little no effect on interest rates. Why does he think that?

Learn Bonds: – Weighing your high-yield bond options. – Last week we considered the current landscape for investment grade bonds, more specifically 10-year pieces of paper. While we discussed the fact that investment grade bonds provide relative capital safety for investors willing to hold to maturity, we also noted that the yields were certainly not eye-popping. In this day and age of low interest rates, investors wishing to achieve more robust returns need to invest in either longer maturity offerings or slide down the credit scale into high-yield bonds, otherwise affectionately known as “junk.”

Learn Bonds: – Improve your memory to improve your returns. –  What Rocky and Bullwinkle and your wife’s cooking have to do with investing.

Learn Bonds: –  Two aggressive asset allocations for income-focused investors. – Over the past couple of weeks, I have written articles discussing asset-allocation models geared toward investors who are entering retirement and have built moderate-to-large nest eggs.  The first two articles in this series presented generally conservative and generally moderate asset-allocation models.  In this article, I would like to outline two generally aggressive asset allocations for a $1 million portfolio.

 

Municipal Bonds

Money News: – Detroit bankruptcy decision may mean big trouble for muni holders. – The U.S. Bankruptcy Court decision Tuesday that Detroit can proceed with its bankruptcy filing was a warning shot for municipal bond investors around the country.

Income Investing: – Muni fund outflow streak hits 28 weeks. – It’s now 28 straight weeks of investor withdrawals for municipal bond mutual funds and ETFs, which just reported an $875 million net outflow for the week ended Wednesday, per the latest Lipper data. That’s pretty consistent with the $870 million withdrawal seen a week ago and the $855 million four-week moving average outflow.

Bernardi Securities: – A Century of tax-exempt municipal bonds: The good, the bad and the ugly. – As the repeal of federal income tax-exemption of municipal bond interest continues to be a threat, let’s review talking points to share with lawmakers. These are based on thorough research and a thirty-two year career perspective of municipal bonds.

Bloomberg: – Illinois trading near junk means buy on pension fix. – Illinois municipal bonds are set to rally from near-junk yield levels after lawmakers passed measures to help fix the worst-funded U.S. state pensions.

Crains Detroit Business: – Detroit bankruptcy has surprising long-term implications for muni bond market. – The bankruptcy court’s Tuesday ruling that makes Detroit eligible to become the largest municipal bankruptcy in U.S. history is not likely to have a major impact on the muni bond market, but it certainly won’t help.

Detroit News: – Michigan plans first bond sale since Detroit bankruptcy filing. – For the first time since Detroit filed for Chapter 9 bankruptcy protection, the state of Michigan plans to sell $30 million of debt in general obligation bonds this week.

Bloomberg: – Illinois lawmakers confront historic burden of pension futility. – When Illinois lawmakers report to the capital in Springfield today for another attempt at fixing the nation’s worst-funded state pension system, the gathering will have a ring of familiarity.

Bloomberg: – Munis face unprecedented 2-year drop, Morgan Stanley says. – Investors in the $3.7 trillion municipal market will probably face negative returns in 2014 following declines this year, the first back-to-back annual losses since at least the 1980s, according to Morgan Stanley.

Morningstar: – U.S. municipal bond sales fall in November as refundings shrink. – Sales of U.S. municipal bonds shrank to $23.16 billion this month, as debt refundings dropped sharply from a year ago, according to preliminary Thomson Reuters data.

Municipal Bonds: – Moody’s assigns Aaa to Ridgefield’s (CT) $8.1M GO Bonds; MIG1 to $5M GO BANs; Outlook stable. – Moody’s Investors Service has assigned a Aaa rating to Ridgefield’s(CT) $8.17 million General Obligation Bonds, Issue of 2013 and a MIG 1 rating to $5 million of General Obligation Bond Anticipation Notes.

 

Treasury Bonds

ETF Trends: – Inverse Treasury ETFs help hedge against rising rates. – Speculation on Fed tapering has pushed benchmark Treasury yields to a 11-week high. Consequently, bond investors have begun shifting out of long-term debt as rates rise, but the more aggressive trader can capitalize on tumbling Treasuries with inverse exchange traded funds.

WSJ: – U.S. to sell $13 bln in reopened 29-year 11-month bonds Thu. – The U.S. Treasury plans to auction $13 billion in reopened 29-year 11-month bonds Thursday. The debt will settle on Dec. 16, 2013 and will mature Nov. 15, 2043.

Huffpost: – Playing with fire. – There is ample discussion about the possible damage that may ensue as a result of the federal government’s inability to agree on budgets and debt ceiling increases. So far, the wrangling on Capitol Hill has contributed to some volatility in the capital markets but nothing as dire as the forecasts of some prognosticators. In fact, Treasury yields actually fell following a debt downgrade by Standard & Poor’s in August 2011.

SFGate: – Treasuries advance for first time in week as Fed purchases bonds. – Treasuries rose, pushing 10-year note yields down for the first time in a week, as the Federal Reserve made two purchases in its program to spur the economy by buying government debt.

ZeroHedge: – Auction system failure forces U.S. Treasury to postpone 3, 6-month bill auctions. – While nobody is impressed by breaking equity and options markets anymore, since this has become a virtually daily occurrence and the habituation level is high, bond markets, and especially the US government’s “guaranteed” bond issuance machinery, are a different matter altogether. Which is why any time something out of the ordinary happens, people pay attention. Such as what happened moments ago when the U.S. Treasury announced that it would delay the closing of the 3 and 6 month Bill auctions, originally scheduled to close today, to tomorrow.

Donald Van Deventer: – Implied forecast for U.S. Treasuries and mortgages drops, with a twist. – The latest implied forward rate forecast from Kamakura Corporation shows projected 10 year U.S. Treasury yields down 0.04% to 0.10% from last week, while fixed rate mortgage yields are 0.02% lower. Mortgage yields, determined by the Monday through Wednesday weekly survey of the Federal Home Loan Mortgage Corporation, lag Treasury movements simply because of the 3-day yield calculation used in the Primary Mortgage Market Survey.

 

Investment Grade Bonds

BusinessWeek: – U.S. company bond sales of $1.48 trillion set annual record. – Sales of dollar-denominated corporate bonds soared to a record for the second straight year, led by speculative-grade borrowers that rushed to offer debt before the Federal Reserve cuts its unprecedented stimulus.

Bloomberg: – Corporate bonds suffer biggest weekly loss since June in Europe. – Company bonds handed investors the biggest loss in six months in Europe this week on concern borrowing costs will rise as the Federal Reserve starts paring stimulus.

WSJ: – Microsoft sells $8 billion of debt. – Microsoft Corp. sold $8 billion of debt in the largest combined dollar- and euro-denominated investment-grade corporate bond deal in more than a decade, according to data provider Dealogic.

Money News: – Fed taper may hurt corporates bonds more than mortgage securities, Morgan Stanley says. – Relative yields on U.S. corporate bonds may widen more than those on government-backed mortgage securities when the Federal Reserve tapers its debt buying, according to Morgan Stanley analysts.

WSJ: – Diverse menu of bonds is served up to investors. – With corporate-debt issuance racing toward a record, some large companies are rolling out unusual offerings in a bid to serve the bond market’s every nook and cranny. Recent weeks have brought a $500 million “green bond” from Bank of America Corp., which has pledged to use the proceeds to finance renewable-energy and energy-efficiency projects, and a $1 billion Goldman Sachs Group Inc. bond that offers variable interest bond.

BDLive: – Sales of US corporate bonds likely to break 2012 record. – Corporate bond sales in the US are poised to eclipse last year’s record as issuers rush to raise cash before the Federal Reserve curtails stimulus that has held borrowing costs close to all-time lows.

 

High-Yield

Money News: – Junk-debt boom leads corporate bonds to record sales. – Sales of dollar-denominated corporate bonds soared to a record for the second straight year, led by high-yield borrowers that rushed to offer debt before the Federal Reserve cuts back on its unprecedented stimulus.

Forbes: – Bullish two hundred day moving average cross – JNK. – In trading on Friday, shares of the SPDR Barclays High Yield Bond ETF (AMEX: JNK) crossed above their 200 day moving average of $40.43, changing hands as high as $40.48 per share. SPDR Barclays High Yield Bond shares are currently trading up about 0.3% on the day. The chart below shows the one year performance of JNK shares, versus its 200 day moving average.

New River Investments: – The low returns of high yield. – Over the last few weeks, as high yield indices’ yields have continued to fall, we have seen a lot of commentary from talking heads about a potential bubble in high yield corporate bonds. This talk is often accompanied with, at worst, a chart of the HYG share price and, at best, a chart of the yield of a high yield index. These are inaccurate and incomplete indicators of risk, prospective return, and future return attribution. In this post I hope to illustrate how someone whose only career objective is to maximize P and minimize L should approach and quantify expected risk and returns.

Market Realist: – Why bond investors should favor high yield over investment grade. – This week’s economic data releases have a shared theme: continued slow and steady economic recovery. As business conditions improve, the risk of default falls for companies that issue debt. Since high yield companies (HYG) are riskier than investment-grade companies (LQD), economic improvement helps them more than it does the stalwarts.

ETF Trends: – New issuance not holding back this junk bond ETF. – European companies have been tapping the high-yield bond markets in a big way this year as banks in the region have been tight when it comes to lending.

Income Investing: – Junk bonds up 0.47% in Nov, 6.83% in 2013. – Junk bonds continued to chug along at their coupon-clipping 2013 pace, gaining 0.47% during the month of November, according to a benchmark Bank of America Merrill Lynch index. That brings year-to-date returns to 6.83%, during a year that the market began with a 6.1% average coupon.

Bloomberg: – Morgan Stanley adds junk-debt analyst Corsair from shrinking UBS. – Morgan Stanley (MS) hired high-yield debt analyst Todd Corsair from UBS AG as the fourth-largest underwriter of U.S. corporate bonds bolsters its position and the Swiss firm reduces the size of its investment bank.

The Times: – What risk? Investors are addicted to junk again. – Banks and investors have slipped back into their bad old ways, with appetite for junk bonds and high-risk debt at pre-crisis levels once again, according to the Bank of England.

Forbes: – Could U.S. high yield be riskier than emerging market bonds? – Like all fixed income professionals – and all investors – he’s trying to work out the outlook for debt in light of the inevitable tapering of QE that must one day take place. He painted a bleak picture – “Even after the Q2 sell off, nothing is cheap in fixed income. Nothing.” But within the bleakness were some interesting distinctions.

 

Emerging Markets

BusinessWeek: – Bonds risk first annual decline in new millennium. – Polish government bonds are headed for their worst performance since at least 1999, at risk of their first annual loss, on concern over the timing of the U.S. Federal Reserve’s planned stimulus reduction.

WSJ: – Emerging Markets debt fund launched by Northern Trust. – To offer investors exposure to the full spectrum of emerging markets debt with the potential for higher yields, diversification and an attractive risk-return profile, Northern Trust has launched the Northern Multi-Manager Emerging Markets Debt Opportunity Fund (NMEDX).

FT Adviser: – Investec AM’s Aird allays fears over EMD fund. – David Aird has dismissed any worries about the capabilities of the Investec Emerging Markets Local Currency Debt fund, after it nearly halved in size in the past six months.

About.com: – Keep an eye on this new bond ETF. – This has been a busy year for bond ETF launches, and the trend continued on Friday with the introduction of the ProShares Short Term USD Emerging Markets Bond ETF (EMSH). While there were already 15 emerging market bond ETFs in existence, EMSH is the first dedicated exclusively to short-term bonds. This fund has a number of potential selling points for investors.

ETF Trends: – Are emerging markets re-emerging? – Last summer emerging markets, both stocks and bonds, had the distinction of being the most unloved asset class. Since then, markets have calmed down. Emerging market stocks are up around 9% since last summer, and have narrowly outperformed their developed market counterparts. Has the luster returned for EM? As is often the case with EM, the story is nuanced. Here are four things to keep in mind.

ETF Daily News: – The new ProShares emerging market bond ETF (EMSH) in focus. – ProShares is best known as an ETF provider of leveraged and inverse funds and it is one of the main players in this market. However, the company has also made a big push into the unleveraged ‘regular’ ETF market as of late, launching a series of funds in this corner of the fund world over the last few weeks.

 

Catastrophe Bonds

Artemis: – Catastrophe bond market reaches all-time high with 20% growth. – Global reinsurance firm Swiss Re says that 2013 will be the second strongest for catastrophe bond and insurance-linked securities (ILS) issuance on record, helping the outstanding cat bond market grow by 20% this year to reach an all-time high.

 

Bond Funds

The Street: – Investing abroad paid off this year. – Some financial advisors have long urged clients to diversify bond portfolios by including foreign issues. Not many investors have taken the recommendation. But this year it paid to look abroad. During the past 12 months, SPDR Barclays International Corporate Bond ETF (IBND) returned 5.0%, and PowerShares International Corporate Bond ETF (PICB) returned 3.3%, according to Morningstar. In comparison, the Barclays Capital U.S. Aggregate benchmark lost 2.1%.

ETF Trends: – Black Friday for Wall Street. – It’s widely known that Black Friday, the Friday after Thanksgiving, is the traditional kickoff for the Christmas shopping season. Much like retail shoppers, Wall Street is experiencing a similar event though it does not come with such a defined time period.

Indexology: – Bond funds unbound. – Most broad market indices — whether they measure equities or bonds — are capitalization-weighted. Such an index will accurately reflect changes in the total market value of the asset class in question. One of the most important characteristics of any asset class is that there is no net supply of alpha. In other words, one manager can be above average only if another manager is below average.

Money Marketing: – Plan B for bonds. – Fixed income used to be a stalwart in many portfolios, producing returns and, in some cases, providing downside protection. But in today’s environment of historically low interest rates, quantitative easing and rising equity markets, bonds have been left in the dust.

LPL Financial: – What does 2014 hold for bonds? – In 2014, portfolios are likely to enjoy more independence from policymakers than in 2013, when the markets and media seemed to obsess over policymakers’ actions both here and abroad. This could be seen throughout 2013, during the government shutdown and debt ceiling debacle, the Federal Reserve’s (Fed) mixed messages on tapering its aggressive bond-buying program, the bank bailout and elections in Europe, and the unprecedented government stimulus referred to as “Abenomics” in Japan, among many other examples.

Morningstar: – Bonds with an attractive income. – Bond yields may have fallen from their pre-credit crisis peak, but payouts remains above the historical average and can provide an attractive income.

NASDAQ: – How to survive the next “taper tantrum”. – Recent U.S. economic releases have been mixed but the latest jobs report, coupled with improving survey data in both the manufacturing and service sectors, has many believing that tapering in late 2013 or early 2014 may be in the offing. We do not believe a reduction in asset purchases is imminent but we would expect a scaling back of asset purchases in 2014 as economic conditions improve. Higher interest rate sensitive assets might not fall to the extent they did in the summer of 2013, but the episode may provide a framework on how different assets may perform.

WSJ: – Bond investors aim to break index chains. – As the bond market falters, investors are seeking shelter in funds that aren’t tied to indexes. These bonds funds are known as “unconstrained,” “go-anywhere,” “absolute return” or “flexible” funds, and they are gaining in popularity on both sides of the Atlantic as investors anticipate the Federal Reserve reducing, or tapering, its bond-purchase program.

Morningstar: – Thoughts for today’s bond market. – Morningstar’s Markets Research group has assembled a PowerPoint presentation entitled Investing in a Rising-Interest-Rate Environment. (The link goes to Morningstar’s Institutional Library, as the presentation isn’t yet available to the general public.) The material sets the current bond market in context–what it means to be invested when interest rates are relatively low, and may soon be rising.

CNBC: – Take cover! Bond market ‘hell’ could be on the way. – If fixed-income investors were under any impression that 2014 could mark an end to the turbulence experienced this year, they should think again – with some analysts predicting volatile conditions on both sides of the Atlantic.

 

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