Bond Managers Warn of Added Inflation Risk…Have Bond Yields Bottomed Out?…and more!

Best of the Bond Market for September 17th, 2012

FT Adviser:Bond managers warn of added inflation risk after Fed’s QE3. – Bond fund managers last week warned of a heightened risk of inflation, after the Federal Reserve last week pledged open-ended quantitative easing (QE) to boost the ailing US economy.

LiveMint:Have bond yields bottomed out? – The recent spike in bond yields is little more than a knee-jerk reaction owing to disappointed expectations of a rate cut. For the past two months, the yield on the 10-year government security has been in the range of 8.05% and 8.26%. The markets seem to have digested the worse and the consensus is tilted towards lower rates in the coming months.

Sober Look: Another side affect of QE3 is that Agency MBS duration has shortened – With mortgage rates expected to decline further, the market is anticipating accelerating prepayments, shortening the effective duration of many MBS bonds. Part of the unprecedented decline in spread against the 10y treasuries (above) was driven by these falling durations, as the “on-the-run” agency paper started trading to shorter dated treasuries, which have lower yield.

Bespoke Investment Group: The rise in global stock markets has led to a huge drop in soveriegn debt CDS prices.  – The cost of insuring against default of the world’s major economies has fallen more than 50% from the highs over the last 6 months.

FT: Bond ETFs come to the rescue as primary dealer inventories continue slide – as dealer inventory levels drop by 80% since 2007, assets under management at corporate-bond themed ETFs are rising.

Governing:The Subtle Slide into Municipal Bankruptcy. – The recent rise of municipal bankruptcies has thrust munis into the spotlight. As a result investors are frantically looking at bond ratings to determine if their investments are safe. But the truth is muni bond ratings tell you virtually nothing about whether or not a city is on the verge of service-level insolvency. A government’s bond rating is a lagging indicator of its financial condition. But there are some tools you can use to get a clearer picture.

New Oak:QE3 and the US economy. – The Great US Recession officially ended over three years ago, yet US housing and employment are still in the troubled zone, pointing to very powerful unresolved underlying economic issues.  Now the key question is if this time housing will pull the economy up — or will the slowing economy overpower it?

James E. Miller:Bernanke’s muni bubble and pleasing public sector unions. – With municipal finances unsustainable in the long run, combined with the Fed’s low interest rates policies, default looks to be inevitable at this point. 

Alpha Guru: – Municipal Bond ETF: The Search for alternative sources of yield. – Why municipals are poised to continue to provide strong total return and yield potential and help meet many investment objectives, not just those seeking tax-managed solutions.

Learn Bonds:Can you save less for retirement by putting more into stocks? – Should you put more of your retirement nest egg into stocks and forget about bonds? An interesting piece by Vanguard suggests you can, but are they right?

GulfNews:ETFs overtaking swaps in junk bonds investments. – Exchange-traded funds are poised to overtake credit derivatives by year-end as a way to speculate on junk bonds, data compiled by Bloomberg shows.

FT:Do bond markets have a roll to play in helping the environment. – The technology, the capital, the capability and the policy understanding to tackle climate change is there, what’s lacking is the funding. With a $289 billion shortfall in renewable energy funding in 2010 alone, could climate bonds be the answer?

Rubicon:Skimpy yields on treasuries got you down? Try corporates instead. – In the bond market, decent yield is a scarce commodity and treasuries and agency debt have not helped income investors at all. The corporate bond market however, has performed well and investors have been rewarded for being invested in the sector.

The Tribune:Is the municipal bond market for you? – Municipal bonds, also called “munis,” are an investment tool many investors utilize and are becoming more popular, but before you choose to join that group, be sure you understand the bonds and their market.

ETF Trends:High-Yield ETFs climb to new highs as treasuries languish. – There is a dramatic shift playing out in fixed-income ETFs as high-yield bond portfolios break out while funds indexed to U.S. Treasuries pull back sharply.

Bond Squawk:Will elections have an effect on muni supply? – Municipal bond supply has been low for 2012 and will continue to be low as we head into year end.  Supposedly, some market players think that the reason for lower supply is due to the 2012 Presidential Elections and the 11 state governorships open for election. But is there any truth to this.

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