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The bond market is causing investors concern. The yield on the 10-year note is hovering near the bottom of this year’s range. While at the same time, the yield curve has been flattening, meaning yields on shorter-duration securities are getting closer to longer-term rates – usually a bad sign for stocks.
So why are Treasury yields so low? The answer according to BlackRock’s chief fixed income investment strategist, Jeffrey Rosenberg is simple. “Because everybody thought they were going to be so high” Rosenberg told CNBC.
To see a list of high yielding CDs go here.
So where do yields go from here? Rosenberg says that he expects yields to move higher from current levels. “We expect rates to go higher but we expect the largest increase in rates to be led by the front end of the curve. This is a tipping point argument around changes in Fed policy and expectations, and so key to our outlook in 2014 is that this is a transitional year, where the economy really does deliver on its potential and really does bring about not just the end of accommodation but the pricing in of the beginning of tightening” he said.
So we are in a period of transition, but what if investors are wrong and the bond market is signaling a downturn in the economy? “If the bond market declines are really signaling what they normally are signaling, then there’s a disconnect in market pricing.” Rosenberg said.
“The broad market concern is not the level of the 10-year, it’s the level of the S&P 500. If the 10-year is right, then the S&P 500 is wrong.” Rosenberg said. “The bond market would then be pricing in recession or a growth slowdown. I don’t think it is…I think it’s a confluence of pricing in very low first quarter growth when positioning was off sides.”
So if Rosenberg is right, bond yields will start picking up at the front end of the yield curve, once earnings start to improve. Which means stocks and bonds will revert to their conventional roles of bond prices falling (bond yields move inverse to prices) as stocks strengthen.
Todays Other Top Stories
Main Street: – Municipal bonds are outperforming stocks. – Municipal bonds are offering higher returns than the broader stock market, so far in 2014. Municipal bonds are especially attractive thanks to tax exemptions. When you look at munis, it’s not just what you earn, it’s also what you keep.
Bloomberg: – Delaware selling $113 million debt to refinance road work. – The Delaware Transportation Authority will sell $113.3 million in senior revenue bonds today to reduce its interest obligations on older debt for highway building and repair projects.
Guggenheim Partners: – Municipal market outlook – May 2014. – Municipal bonds posted strong returns in the first quarter of 2014 and look set for a strong year thanks to tight supply amid an improving macroeconomic environment and expectations that the refinancing wave is over for now.
Reuters: – Older investors sue UBS over risky Puerto Rico bond funds. – UBS AG has been sued by older investors who claimed it steered them into mutual funds that invested heavily in Puerto Rico bonds, costing much of their life savings and causing billions of dollars of losses because of the commonwealth’s fiscal woes.
LearnBonds: – Full-time business and part-time jobs. – Some pundits are warning that the pickup in job growth should result in wage gains. However, there has been an interesting change to the relationship between hiring and productivity. BLS data indicate that job growth has picked up during the past three months. However, Nonfarm Productivity hasn’t.
About.com: – Will Federal Reserve rate hikes crush the bond market? – In recent years, investors have been told ad nauseum that the bond market is set to collapse. The thinking behind this widely-held view is that with the U.S. Federal Reserve “tapering” the bond-buying program known as quantitative easing (QE) and likely on track to raise interest rates in 2015, yields have nowhere to go but up. But is this really the case?
WSJ: – Treasury bonds pull back; 10-year yield hits low in 2014. – Treasury bonds pulled back Monday after an earlier rally sent the benchmark 10-year note’s yield to the lowest level of the year.
Bloomberg: – U.S. 3-year note yields highest since 2011 in pre-sale trading. – Treasury three-year notes being sold by the U.S. today yielded the most in pre-auction trading since a May 2011 sale as an improving economy strengthened prospects for the Federal Reserve to raise interest rates next year.
Donald van Deventer: – The 30 best-value bond trades with maturities of 1 to 5 years. – There were 24,443 bond trades in 4439 non-call fixed rate senior issues on May 2. We rank the 30 best-value trades for maturities of 1-5 years, using the credit spread-to-default probability ratio as criterion for “best.”
WSJ: – Caterpillar sells 50-year bonds. – Caterpillar Inc. sold 50-year bonds on Monday, taking advantage of investor demand for income-generating securities while interest rates remain low. The construction-equipment maker is the first U.S. company, excluding financial institutions, to sell 50-year corporate bonds in nearly a year, according to data provider Dealogic.
FT: – Banks back launch of U.S. corporate bond dark pool. – U.S. corporate bond dealers will start trading securities in off-exchange venues to improve the operation of a market that has come under pressure from higher capital costs.
High Yield Bonds
ETF Trends: – Short duration junk bond ETFs in the limelight. – Amid speculation the Federal Reserve is inching closer to raising interest rates, investors are fleeing some longer duration high-yield bond exchange traded funds in favor of junk ETFs with less sensitivity to rising rates.
Goldseek: – How to find junk bonds that don’t stink. – Why would anyone ever buy junk bonds or a junk bond fund? The reason that junk bonds are so popular with investors is that if there are enough interest-rate differentials to offset the default risk, junk bonds can be a better deal than their triple-A peers and make for a diversified bond portfolio.
FA Advisor: – Junk bond funds see outflows as KKR pays up for loans. – Junk-rated companies are paying up to borrow in the loan market as investors yank more than $900 million from funds that buy the debt.
Reuters: – Junk bond fund yields trounce peers as managers buy stocks to boost returns. – If you’re looking for top performing U.S. junk bond funds, pick one that’s maxed out in stocks. Bond-fund managers at Loomis Sayles, Fidelity and Eaton Vance are trouncing their benchmarks and almost all their peers by taking advantage of asset allocation rules that permit as much as 35 percent of their holdings in stocks.
Businessweek: – JPMorgan at odds with IMF in touting emerging-market bonds. – JPMorgan Chase & Co., the biggest U.S. bank by assets, sees no signs of a bubble in emerging-market corporate debt, challenging the International Monetary Fund’s warning on rising risks in the bond market.
Desert News: – Take care with catastrophe insurance bonds. – Through the end of the first quarter of 2014, issuance of catastrophe bonds, or CAT bonds, totaled a reported $4.75 billion. These fixed income bond instruments have generally been structured to pay coupons at relatively attractive levels, compared to many other fixed income securities with similar credit ratings.
Wealth Management: – Freak out time is coming. – Fixed-income strategist William Eigen told a standing-room-only crowd at IMCA’s annual conference that traditional fixed-income strategies, the kind that have worked for the past thirty years, aren’t going to cut it in the next year or so.
Kiplinger: – When to sell a mutual fund (And six funds to sell). – Knowing when to unload a fund is tricky. In fact, choosing a fund to buy is probably an easier process. But just as you should have a checklist for buying, a checklist for selling can help, too. Here are five factors to consider.
Joseph P. Porter: – 5 ETFs for a reliable retirement portfolio. – The ETFs presented here provide a diversified portfolio containing bonds and equities in a way that can be adjusted to suit the investor’s interests.
David Fabian: – Are active ETFs worth the management fee premium? – With so many funds now in the mix, ETF providers are continuing to introduce innovative active strategies to compete with established passive indexes. While active management typically leads to creative portfolios, it also paves the way for higher fees to subsidize research, security selection and trading.
Why are so many people happy to pay close to 7% yield to stay short an asset class that has been killing them? $tbt
— Peter Tchir (@TFMkts) May 6, 2014
US 10yr Treasury yield advantage to 10yr Bunds 1.1%, still very near ten year highs & has helped draw recent demand
— AnthonyValeri (@Anthony_Valeri) May 6, 2014
Risk premium should go higher as the Fed tapers but stocks do look attractive vs Bonds. Ex-ante ERP is now around 2.8%
— Ed Bradford (@Fullcarry) May 6, 2014