To get the Best of the Bond Market delivered to your email daily click here.
Who’d be a Bill Gross right now? Investors have abandoned bonds in record numbers, withdrawing $75 billion from bond funds in June alone. The Fed’s taper shenanigans won’t go away and more bond armageddon headlines appear every day.
So is Bill Gross worried? PIMCO’s Managing Director Douglas Hodge says not. Hodge told the Financial Times that the bond sell-off was an “inflection point” and merely part of an “S-curve” rather than a long term decline in bond markets.
Hodge went on to say that pension funds and insurance companies have continued to buy into longer-dated bonds, which are more sensitive to changes in interest rate expectations and that individual investors will follow suit.
So why is he so bullish? Well, as interest rates rise, yields will increase, enhancing the opportunity for bonds to provide a more attractive return and income.
It ultimately comes down to why you own bonds in the first place. If you’re looking for capital appreciation, bonds are not going to be your friend for the next few years. But if you’re looking for higher income from your capital, without exposing yourself to unnecessary risk, higher bond yields are good news.
Todays Other Top Stories
Reuters: – Don’t shun U.S. bonds, even in a dismal market. – The U.S. bond market is on track to suffer its worst year since 1981, but don’t go overboard in dumping bonds, experts say.
Morningstar: – How tapering will affect bonds. – Corporate bonds will struggle over the next month as investors attempt to anticipate the timing of the Federal Reserve tapering QE.
Learn Bonds: – Providing perspective on your bond “losses”. – There never seems to be a shortage of investment professionals willing to remind you how much money you will lose if bond yields rise. When combining the constant chorus of professionals telling everyday investors to sell bonds and buy stocks with the recent unrealized mark-to-market changes in your bond portfolio, you may be feeling a bit unsettled. Extreme volatility in financial markets has the tendency to cause people to second guess prior decisions they’ve made. For those individual bond investors feeling a bit uneasy due to the recent unrealized mark-to-market declines in their bond portfolios, consider asking yourself the following questions.
Morningstar: – Are rising rates a reason to shun all bond funds? – With all the talk of rising interest rates, bond bubbles, and a great rotation into stocks, investors may think it’s time to jump ship on all bond funds. However, various sectors of the bond market react differently during periods of rising rates. What’s more, while history can be a guide, the economic environment as rates rise is always unique.
Scott Grannis: – The glass is half full – 20 optimistic charts. – I continue to believe that the market is dominated by pessimism rather than optimism. Or, if you will, that there is a shortage of optimism. What follows are some 20 or so charts, in random order, which highlight optimistic developments in the economy and financial markets which I believe are underappreciated. They paint a picture of an economy that is stronger and more durable than the skeptics seem to believe. There’s still plenty of room for improvement, to be sure, but there are few if any signs of deterioration.
About.com: – Is there a buying oppertunity in muni bonds? – Over the years, the municipal bond market has proven itself to be sensitive to “headline risk,” or in other words, the risk that broader news developments will lead to periods of volatility and short-term underperformance. Since municipal bond investors tend to be a fairly conservative group by nature, these events can be very unsettling when they occur. However, history has also shown that they tend to be good buying opportunities for long-term investors.
Hawkinvest: – These 3 ‘rebound’ plays offer yields of 10% or more. – Regardless of whether the 10-Year Treasury Bond yields 2.5%, or a bit more or a bit less, many investors still need income and higher yields than what the 10-Year offers. That is why the current pullback in many high yielding stocks and closed-end funds could be a great buying opportunity. With this in mind, here are 3 picks that offer yields of about 10% or more and also have rebound potential.
InvestorPlace: – This is not the time to back down on bonds. – Keep your fingers crossed. Stocks are still playing a dangerous game of chicken with the bond market, but we’ve gotten a few teeny-tiny indications in the past few days that maybe, just maybe, a fatal collision can be averted.
All Star Charts: – Stocks and bonds break apart. – A funny thing happened on Monday afternoon. As stocks rolled over into the close, US Treasury Bonds didn’t follow. This is now something different, a change in character for these markets. Last Friday we ran the numbers: Stocks and Bonds had a 1-week positive correlation of +0.95, a 2-week correlation of +0.94 and a 1-month +0.79. The results showed a very high positive correlation between the two asset classes. Interest rates rising was bad for stocks and bonds. But no more.
ETF Trends: – ProShares eyes EM bond ETF. – ProShares, the largest issuer of inverse and leveraged ETFs, has filed plans with the Securities and Exchange Commission to possibly introduce a short-term emerging markets bond ETF that would add to the firm’s growing lineup of non-leveraged products.
Peter F Way: – Bondholders – Mr. Market is warning you, rising rates are coming! – Just this past Wednesday, semi-official comments by a Federal Reserve Bank sometimes-spokesperson heightened perceptions that the Fed would indeed be “tapering off ” its open-market purchases of (usually ) US Government (and sometimes federally-insured mortgage) bonds. This not-so-joyous piece of apparent confirmation to widely speculated rumors (you know how the D.C. crowd works) was enough to cause market quotes on the long maturity US Government bonds to rise up to 3.92%, a hike of 8% in a week, and +10% from its level a month ago.
IndexUniverse: – HYLD: Active Star Of Bond ETFs—For Now. – Success stories among actively managed funds are harder and harder to come by, as the recent article by IndexUniverse’s Cinthia Murphy made clear. But as everyone knows, this doesn’t mean active managers can’t outperform the market.
Globe and Mail: – Bond returns: How to avoid the interest-rate steamroller. – The unthinkable is taking shape for all the people who turned to bonds in recent years as a more dependable alternative to the stock market. With 2013 just about two-thirds done, bond funds are well on their way to their first money-losing year since the 1990s. Broadly diversified bond funds are down in the 3- to 4-percent range on a year-to-date basis. Much bigger losses have been logged by more specialized niche funds, notably those investing in long-term and real-return bonds.
Donald Van Deventer: – Citigroup Inc. Bonds: A ‘prince’ of an investment after many ‘Pandit’. – The bonds of Citigroup Inc. provide a very attractive ratio of credit spread to default probability, with the short maturity reward for bearing credit risk totaling more than 40 basis points of credit spread for every basis point of default risk. This is among the most attractive reward-to-risk ratios analyzed in this series of bond studies.
SoberLook: – Speculative treasury positions are now net short and growing. – There still seems to be a broad bearish sentiment on treasuries – in spite of the massive selloff. The charts show speculative net positions in LIBOR futures and the 10yr note futures. LIBOR futures are often used to take a speculative view on long-term interest rates (usually via a “strip” of futures extending out a number of years – effectively mimicking a rate swap). The 10yr note future is the most common way of betting on rates in the futures market.
Minyanville: – What if the 10-year Treasury yield breaks its long-term downward trend? – With the taper talk all but solidified within the market’s landscape, at least on an intermediate-term basis, the aforementioned yield resistance level seems clear enough. But what if the Treasury yield does break its long-term downward trend? What happens then?