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Last year the bond market threw a bit of a tantrum, with yields on 10-year Treasuries falling to a low of 1.61% on May 1st, after rumours surfaced that the Fed was about to begin tapering back the amount of bonds it purchases as part of its economic stimulus package, known as quantitative easing.
Fast forward to 2014 and with tapering well underway, how is the bond market performing? Quite well it seems. 10-year Treasuries have returned 1.9% so far this year, rebounding from a 3.4% drop in 2013, according to data compiled by Bank of America Merrill Lynch.
So whats different this time? Well we have a new Fed Chair, Janet Yellen. At the start of the year, yields on 10-year Treasuries were trading at a 29-month high, but have since retreated after Yellen pledged to maintain her predecessor Ben Bernanke’s tapering policy in “measured steps” and keep borrowing costs low to spur economic growth.
“Bond markets understand that Bernanke and now Janet Yellen are talking from the same song sheet,” Neil MacKinnon, a strategist at VTB Capital and former U.K. Treasury official told Bloomberg. “The market has bought into the idea that Fed tapering is not tightening.”
Yellen also went a step further than her predecessor when she signaled that the Fed won’t automatically lift interest rates once the unemployment rate falls below 6.5 percent, as it once said it would. Instead, the Fed will consider a variety of economic data and provide investors with guidance on its intentions. “We do want to give markets as much of an indication of how we expect to conduct policy as we can,” Yellen said.
This aligned with the shrinking budget deficit and reduced political discord along are also steadying markets, says Erik Schiller, a money manager for Prudential Fixed Income.
The U.S. budget deficit will fall to 3 percent of gross domestic product this fiscal year, down from 9.8 percent in 2009 and the lowest in seven years, the Congressional Budget Office projected in February.
Lawmakers in December passed the first bipartisan budget from a divided Congress in almost three decades. We have “relatively stable long-term deficit projections, very low potential policy risk,” says Schiller. “Both of those are helping to keep things muted.”
Todays Other Top Stories
ValueWalk: – Puerto Rico munis SWOT analysis. – Puerto Rico is expected to issue $2 – $3.5 billion in general obligation (GO) bonds later this month, the latest since a $2.7 billion offering in 2012, and with all the attention on the island’s credit rating over the last six months both traditional muni investors and new investors are expressing interest in the GO bonds.
ETF Trends: – California muni ETFs plays as state plans $1.6 bond sale. – California is set to offer the largest general-obligation municipal bond sale since October. Investors interested in gaining targeted exposure to Californian muni debt can take a look at a couple exchange traded fund options.
The Republic: – Investors are dipping back into municipal-bond mutual funds after fleeing them last year. – Money is flowing once again into muni-bond mutual funds, a turnaround from last year’s exodus. So far, investors have been rewarded for renewing their interest, but managers caution that several challenges remain.
abcNews: – Can the calm Last in the municipal bond market? – Money is flowing once again into muni-bond mutual funds, a turnaround from last year’s exodus. So far, investors have been rewarded for renewing their interest, but managers caution that several challenges remain.
MuniNetGuide: – Record “high yield” Puerto Rico deal looms as muni supply returns. – Global financial markets continue to be buffeted by the events in the Ukraine, with volatility rising in both directions. After selling off on Monday, equities staged a strong rebound on Tuesday as Vladimir Putin, under pressure from the West, appeared to limit his territorial ambitions to Crimea for the time being.
Bloomberg: – Yeshiva University muni trading surges to record on Moody’s cut. – Trading in Yeshiva University’s debt surged to a record after Moody’s Investors Service lowered the New York City school deeper into junk status.
WSJ: – Charles Schwab and J.P. Morgan extend agreement giving Schwab clients access to municipal and corporate bond issues. – Charles Schwab has extended its agreement with J.P. Morgan to provide Schwab clients with access to a broad range of J.P. Morgan’s fixed income securities.
Businessweek: – Olympic hoop dreams in U.S. begin with parking debt. – USA Basketball plans to move to Arizona after 35 years in Colorado. The first step is building parking facilities, which may not generate enough money to repay the municipal bonds financing the construction.
ValueWalk: – U.S. Treasuries: Banks turn bullish as hedge funds, real money sell. – Investors are positioned for bear steepening, with hedge funds and real money turning bearish as banks start buying Treasuries.
FT: – Companies rush to sell debt amid blockbuster week. – A rush by companies to sell bonds has led to a blockbuster week of issuance in the US, with investors scrambling to put money to work as the prospect of military conflict over Ukraine recedes.
CNN Money: – Is the bond market rigged? – Big IPO-like spikes, clients being favored over others, and the potential for unfair Wall Street profits. This certainly sounds like another manipulated market.
FT Adviser: – Keep an eye on the exit for high yield. – Given the deluge of macro worries raining down on markets at present, it is perhaps all the more impressive that high-yield bond spreads continue to grind tighter.
IFR Asia: – Mining-related firms see mixed fortunes in US high-yield. – Canadian mining company Imperials Metals Corporation’s debut high-yield bond flew off the shelf on Thursday on the back of a US$3bn-plus order book as investors clamored to buy a rare new name in the under-supplied high-yield bond market.
Forbes: – Where to invest now? U.S. growth funds and junk bonds. – Despite a rocky start this year, stock markets quickly rebounded from the January sell off and ended February with major indexes back in the black for 2014. After strong gains last year—in fact, five years of strong gains—markets were due for a pullback. I don’t expect that 2014 will be as smooth sailing as 2013, but I do expect to prosper from trends coming our way.
The Province: – Junk-bond bears appear as rally seems to be near its end. – High-yield credit has so far been one of the best bets of the post-financial crisis era, but the impressive rally in so-called junk bonds may be near its end, say analysts.
Westport Now: – Catastrophe bond expert: Wrong partner could be disaster. – Westporter John Seo, who now makes a pretty good living at gauging the risk of catastrophic events, told a Westport Library audience tonight choosing the wrong entrepreneurial partner could be a disaster. He said his path to becoming one the world’s experts at what he does was not an easy one.
Bloomberg: – Emerging world poses more danger than in 1990s. – Developed economies are less resilient to an emerging-market shock than they were in the 1990s, when crises from Thailand to Russia rattled investors without triggering a global recession.
Business Insider: – Money is still pouring out of emerging markets but Australia should be OK. – ANZ’s latest Portfolio Flow report has just hit the inbox, and it shows once again that funds are leaking from emerging markets, and at an accelerating rate.
MarketWatch: – Flows data show investors still want nothing to do with emerging markets. – Judging by fund-flow data, Bill Gross might be more willing to share a golf cart with Mohamed El-Erian than most investors would be to jump into emerging-market assets these days.
Emerging Markets Daily: – Barclays: Foreigners started buying EM bonds in February. – Even though the EPFR fund flow data shows investors are still pulling money out of the emerging markets dedicated funds, country-level bottom-up research conducted by Barclays shows in February, foreigners started buying emerging markets bonds.
Quartz: – Emerging markets have $318 bln more in offshore debt than we thought they did. – Developed economies looked on in horror the last time we had a giant emerging-market meltdown, in the late 1990s. But they were pretty insulated from the impact.
ETF Trends: – Some help for emerging markets bond ETFs. – Volatility in the developing economies pressured riskier assets at the start of the year, but investment money is slowly trickling back into emerging market debt country-specific exchange traded funds.
Cliff Smith: – Tactical bond strategy for rising Treasury rates. – Yes, the market seems to be continuing its bullish trend (as of the close of March 5, 2014), and as long as it does, we want to be in equities in some degree. But we must be prepared for the inevitable: a bear market is coming.
Wall St Cheat Sheet: – 3 Reasons to keep your bond portfolio flexible. – There are three important factors that will have a major impact on the way that investors should think about bond investing in the coming year — and, hopefully, help investors avoid any unnecessary losses.
BusinessWeek: – ETF investors spurn bonds with $7.3 billion leaving fixed income. – Investors are pulling money out of exchange-traded funds that buy bonds in the U.S., with the biggest outflows from government securities as they shift into stocks, signaling a willingness to delve into riskier assets.
Donald van Deventer: – The 20 best value bond investments for maturities of 10 years or more. – Tuesday’s sell off in the bond market coincided with massive withdrawals from U.S. fixed-income exchange-traded funds.
WSJ: – Bond ETFs see record weekly withdrawals. – Investors yanked a record amount of cash bond exchange-traded funds last week and sent money into stock funds, as easing tensions around Ukraine prompted a sharp rebound in risky investments.
Pittsburgh Post: – Financial advisers warn of potential ‘land mine’ in bond portion of target date funds. – The last time that target date funds failed to deliver on their promises to retirement investors was in 2008. The stock market crashed and many people who were near the end of their working careers suffered steep losses because fund managers had weighted their portfolios too heavily with stocks.
Gross: Sell what the Fed has been buying because they won’t be buying them when Taper ends in Oct.
— PIMCO (@PIMCO) March 7, 2014
Dudley: “I conclude that the decline of the unemployment rate significantly overstates the degree of improvement in the labor market.” — Ed Bradford (@Fullcarry) March 7, 2014
If you had any doubts as to whether the muni market was still the Wild West, the Puerto Rico deal should have cleared that up for you.
— Bond Girl (@munilass) March 7, 2014