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Bill Gross is out with his February newsletter, in which he warns investors not to gorge themselves on highly leveraged global markets. Gross argues that credit isn’t being created quickly enough to support the rosy growth forecasts for the economy and financial markets.
Why? Gross argues a shrinking fiscal deficit means the government is no longer as big a source of credit as it used to be. Align that with the fact that the Fed is also scaling back on its monthly bond purchases and you have a recipe for slow growth going forward.
The combination of smaller government deficits and tapering of the Federal Reserve’s quantitative easing program, means the rise in debt is slowing, which Gross says is bad news for risky assets like stocks but good news for, you’ve guessed it, bonds!
“…as credit goes, so go the markets, one might legitimately say, and I do most emphatically say that!,” Gross wrote.
What’s Gross’s advice for navigating this new world: Be careful, and buy high quality bonds as riskier investments such as stocks may lose steam.
“Don’t be a pig in today’s or any day’s future asset markets,” he said. “The days of getting rich quickly are over, and the days of getting rich slowly may be as well.”
You can read the full Bill Gross investment outlook here.
Todays Other Top Stories
Washington Post: – Puerto Rico bonds downgraded to junk levels. – Credit-rating agency Standard & Poor’s downgraded Puerto Rico’s general-obligation bonds to junk levels Tuesday, making it even more difficult for the fiscally distressed island to borrow money and dig out from its severe fiscal problems.
WESA: – Pittsburgh’s municipal bond rating continues to improve. – A decade ago, the city of Pittsburgh’s municipal bonds were a risky investment. That’s a far cry from where the city is today, says Scott Kunka, director of finance for the city of Pittsburgh.
YCharts: – 4%+ Yielding munis vs. everything else. – As noted previously, municipal bonds are off to a promising start in 2014, continuing to mend from a very rough 2013 in which the iShares S&P National AMT-Free Muni ETF (MUB) was down 9% at one juncture, and ended the year 3% lower.
MuniNetGuide: – Puerto Rico after the downgrade: What now? – The first shoe has dropped. Last night, Standard & Poor’s ended months of market speculation by finally downgrading the Commonwealth of Puerto Rico’s G.O. debt from BBB- to BB+, i.e. below investment-grade. The GDB’s rating was also cut to BB. Both ratings remain on Negative CreditWatch, signaling that further downgrades are possible. So what does this all mean for PR’s “market access,” going forward?
WSJ: – U.S. not contemplating financial assistance for Puerto Rico. – Puerto Rico has shown the “political will” to tackle its economic problems, but more must be done to address the island commonwealth’s financial situation, a U.S. Treasury spokesperson said late Tuesday.
LearnBonds: – What’s going on with the 10-year Treasury? – One of the more crowded trades over the past twelve months has been a short (bet against) of treasuries. Popular consensus has been that the economy is in the process of bottoming out and that the Fed will ultimately bring QE to an end, ushering in a higher interest rate environment. But thats not how its played out.
WSJ: – Longer Treasurys lead way. – Treasury bonds with longer maturities led a bond-market rally Monday following disappointing manufacturing data in the U.S. and China.
FT: – Banks urge U.S. Treasury to take bigger role in debt sales. – Wall Street banks are urging the US Treasury to play a more active role in how the country’s debt is sold, encroaching on the turf of the Federal Reserve Bank of New York.
ValueWalk: – Bernanke tapers QE before leaving the Fed, but can it last? – Ben Bernanke might have left his successor with a poisoned gift… Didn’t he taper so that he could leave the Fed with a positive image, all the while knowing it wouldn’t be tenable?
WSJ: – Debt investors again head to safer shores. – Bond investors have been buying up ultrasafe debt and pulling back from higher-yielding bets in recent weeks, suggesting waning confidence that rates will rise and the Federal Reserve will continue to withdraw its bond-buying stimulus.
HighYieldBond.com: – High yield bond issuance totals $5.9B as market eyes stocks, Treasuries. – High-yield bond issuance in the U.S. totaled $5.9 billion last week, up from $4 billion the previous week. This activity brings year-to-date high-yield bond volume to $25.5 billion. That’s down from the $29 billion seen at this point in 2013, according to S&P Capital IQ/LCD.
About.com: – High yield bonds have made a 180-degree turn from 2013. What’s next? – High yield bonds were one of the few segments of the bond market to produce a gain in 2013, but the opposite has been true thus far in 2014. Through February 3, the iShares High Yield Corporate Bond ETF (HYG) had posted a year-to-date total return of just 0.10% – well below the 1.88% return generated by investment-grade bonds.
Morningstar: – Advisers bullish on emerging markets. – Professional investors are set to up their clients’ exposure to emerging markets in the coming months – as fears surrounding slower growth and volatility subside.
Reuters: – Investors cling to frontiers as emerging markets sink. – As emerging markets tumbled this year, the riskiest country groupings on the fringes have been a haven. Small markets, local stories and in some cases pegged currencies backed by strong central bank reserves have shielded frontier markets from the worst of the emerging market rout.
Artemis: – Capital weighted cat bond spreads at issuance hit low in 2013. – The decline in catastrophe bond and insurance-linked security (ILS) spreads and premiums over the last year has been well document, with some tranches seeing 40% declines in pricing over comparable issuance a year earlier.
David Fabian: – Fine-tuning your ETF income portfolio for 2014. – The whoosh that you just heard is the air being let out of stocks in January and a flight to quality in treasuries that has reasserted the need for a balanced income strategy. At the end of last year it seemed that the mainstream bias had convinced us that bonds were a death trap in the face of rising interest rates and stocks were the only place to be. Well that didn’t last long…
Cliff Smith: – Conservative bond strategy returning 12% annually and 3.5% maximum drawdown. – Cliff Smith shows the results of low duration MDAs applied to HYLD and show that a Compounded Annual Growth Rate.
Anthony Valeri – LPL Financial: – Bond market perspectives. – Uncertainty over EM weakness and whether the weather is truly responsible for recent softness in economic data is likely to keep bond yields range-bound over the near term. We believe the U.S. economy will resume the improvement that began in late 2013 and EM growing pains will not impact broader financial markets over the longer term. We would use recent bond strength as a selling opportunity.
abc News: – A New Way to Invest in a 401(k): ETFs. – It sounds like a Zen saying, but it’s also an investing strategy that more of us are adopting. Every month, billions of dollars flow into mutual funds and exchange-traded funds that simply track a market index rather than try to beat it. Demand is so strong for the lower costs of index funds that it’s pushing the industry to alter its offerings. The latest shift: 401(k) plans built entirely around ETFs, rather than traditional mutual funds.
ValueWalk: – Large cap value mutual funds love industrials. – Goldman Sachs analysts have released their Mutual Fundamentals report, breaking down a vast amount of data into 12 key points. Here is an excerpt with a specific focus on large cap value equity and bond mutual funds.
If you are buying Puerto Rico debt now, what is the point? Why not wait until after second downgrade when funds are forced to sell?
— Bond Girl (@munilass) February 5, 2014
Crescenzi: New CBO data: US budget deficit $514bn in 2014, less than half of 2012. Tsy issuance will fall. Supportive and offsets Fed taper.
— PIMCO (@PIMCO) February 5, 2014
Mather: indiscriminate selling in EM bonds & panic buying of developed world is subsiding. Time for value investors to consider stepping in.
— PIMCO (@PIMCO) February 5, 2014
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