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Bond investors have had it tough so far in 2014, with many positioning themselves for for economic growth and therefore rising bond yields. But thats not how its played out.
Since January yields have fallen, with the yield on benchmark 10-year US government bonds falling below 2.5 percent for the first time since last summer, after starting the year near 3 percent.
To see a list of high yielding CDs go here.
So what’s happening? Despite markets looking ahead to the end of QE, central bankers appear, finally, to have convinced investors that they will keep interest rates at historic lows for some time yet.
There are also nagging doubts about the strength of the U.S. recovery. Recent data has been mixed at best, with Thursday’s disappointing U.S. industrial output a prime example. U.S. yields are also higher than those in “core” Europe and Japan, which has helped boost their appeal.
While, others argue that the European Central Bank is a bigger influence. John Wraith, a strategist at Bank of America Merrill Lynch, says falling bond yields in the US and UK do not reflect diminishing investor confidence in recovery.
Whatever the cause of low yields, the effect is the same. Investors have been buying more bonds to benefit from rising prices. (Bond prices move inversely to yields.) A process which has become known as the “reverse great rotation”. In reference to last years “great rotation” in which investors were supposed to abandon bonds and move into stocks.
The question now is whether continued low interest rates and falling bond yields could lead to a more violent market move later. “Investors are buying into bonds and are putting more risk into their portfolios on the basis that interest rates are going to stay low,” says Mr Salford at JPMorgan. “Unwinding those positions again will cause disruption.”
“Everyone knows that policy makers face a difficult exit from QE,” says Jim Leaviss, head of retail fixed income at M&G Investments. “We saw a hint of that last May. The further they fall, the greater the disruption may eventually be.”
Todays Other Top Stories
ETF Strategy: – First Trust launches actively managed municipal bond ETF. – First Trust, a leading provider of exchange-traded funds, has unveiled an actively managed ETF providing exposure to tax-exempt municipal debt securities, while offering daily liquidity and full transparency of holdings and pricing.
Governing: – 2 Reasons to be upbeat about the muni bond market. – Let’s get the bad news out of the way first: Despite continued low borrowing costs, the first quarter of 2014 saw 26 percent lower issuance in the municipal bond market than last year. Moreover, there’s not much optimism that things will improve. Market experts predict that 2014 activity overall will be down by 8 percent to 12 percent.
Businessweek: – BNY Mellon may close muni opportunities fund amid tax-free rally. – John Flahive, director of fixed income at BNY Mellon Wealth Management, said he’s considering closing the company’s Municipal Opportunities Fund (MOTIX:US) to new investors as tax-free yields fall to 11-month lows.
Businessweek: – Muni yields set for biggest weekly drop in a month as sales ebb. – Yields in the $3.7 trillion municipal market fell this week by the most in a month as Treasuries rallied and local borrowing declined.
Market Realist: – Why the market sees a subdued demand for 30-year Treasury bonds. – The demand for 30-year Treasury bonds remained subdued as seen in the bid-to-cover ratio of 2.09x. The auction size was higher at $16 billion from $13 billion in the April auction. So whats happening?
Market Realist: – Sovereign international bonds versus the US Treasuries. – In this section, we will compare the performance of domestic bond funds investing in the U.S. Treasury securities with international bond funds, which invest in sovereign bonds issued by foreign governments.
Wall Street Rant: – Many government bonds yielding less than United States. – I can’t listen to a talking head, bond manager, strategist or seemingly anyway without hearing about how “Rates can only go higher from here”. When in reality THEY CAN go lower! In fact, when you look around the world, on a relative basis, THEY SHOULD!
Donald van Deventer: – Forward T-bill rates flatten. – Projected one month Treasury bill rates showed a flattening this week, with rates in 2020 down by as much as 0.18% and rates in 2024 up by 0.02%. Forward one month T-bill rates are now projected to peak beyond the ten year horizon of the forecast, rising steadily to 3.77% in April 2024. Here are the highlights of this week’s implied forecast.
CNN Money: – Why are bond yields so low? – U.S. stocks hit new all-time records earlier this week and the economic recovery is on the cusp of turning five years old. So why are investors continuing to rush into safe haven Treasury bonds?
LearnBonds: – Alcoa – Respectable buy on a return to profitability. – Alcoa (AA) , a world leader in aluminum, celebrated its 125th anniversary in 2013 with a downer: a 2.8 percent drop in revenue and losses of $2.43 per share. The consensus on Wall Street is that the company will return to profitability in 2014, but the question is: is the stock priced right? From my perspective, this venerable stock is a decent, if not thrilling BUY.
High Yield Bonds
Forbes: – Retail cash inflow squarely positive to high yield bond mutual funds, ETFs. – Retail-cash flows for high-yield funds were squarely positive this week, with $337 million plowed into mutual funds and $135 million infused to exchange-traded funds, for a net inflow of $472 million in the week ended May 14, according to Lipper.
The Republic: – Fund managers suggest dialing back expectations for junk bonds following years of big returns. – Junk bonds have been strong investments since the recession, and investors continue to pile into the market. But fund managers say they’re looking less attractive. Many are taking a step back and urging investors at least to temper their expectations.
Huff Post: – Warning signs are flashing for junk-bond investors. – Junk bonds have been strong investments since the recession, and investors continue to pile into the market. But fund managers say they’re looking less attractive. Many are taking a step back and urging investors at least to temper their expectations.
ETF.com: – Experts question high yield ETF liquidity. – Liquidity in European corporate bonds has come under fire by industry experts who claim that investors who are piling in to the asset class via exchange traded funds on the hunt for yield might not be able to get out in the event of a market downturn.
Businessweek: – Junk buyers jockey for worst in race to bottom. – Bond buyers have never been paid so little to lend to the riskiest junk-rated companies, yet they’ve been gobbling up their debt at an accelerating pace.
IFR: – Time to increase bets on EM? – Only a year after talk of a reduction in monetary stimulus in the US sent emerging market bonds into a tailspin, the asset class has staged an impressive recovery and investors are betting that spreads will continue to grind tighter.
Reuters: – New emerging market rush may spell trouble ahead. – Emerging markets are among the biggest beneficiaries of a fresh rush for riskier assets by yield-hunting investors but almost indiscriminate demand today may be sowing the seeds for a bigger sell-off in future.
Financial Planning: – How to get yield if rates stay low. – Don’t get their hopes up, advised Kathy Jones, vice president and fixed income strategist for Charles Schwab’s Center for Financial Research.
David Fabian: – Going all in on bond ETFs? You may be a little late. – The most talked about trade of the year so far has been the snapback in bonds. After entering 2014 as one of the most hated asset classes (alongside commodities), the majority of fixed-income securities have outperformed stocks as a function of investors reshuffling their portfolios and assessing risks.
FA Mag: – Advisors told to get a jump on interest rate hikes. – Financial advisors may find themselves in a tough spot with their fixed-income holdings if interest rates start to rise—a strong possibility once the Federal Reserve completely unwinds its stimulus program.
MarketWatch: – What investors should really worry about. – After a brief respite from the doom-and-gloom chorus of the past five years, it seems as though the bear chorus has recently picked up again. They are hoping beyond hope that they are finally right. And hoping that they get their second chance to buy low. It’s almost like being on the playground and asking for a “redo.” I don’t think the stock market works that way. Especially when so many people are trying to be so smart. But are they right?
WSJ: – Ratings firms go own way on new bonds. – In a recent, and rare, bout of partisanship, ratings firms are taking sides on whether a new type of bond represents a safe bet or a slightly risky one. The discord, the firms say, shows that the industry is responding to critics who have said that raters in the past have too.
Gross: Let’s see — The market expects Fed Funds at 3% in 2018 but wants to buy the 10-yr at 2.5% or lower today?
— PIMCO (@PIMCO) May 16, 2014
“Average yields on CCC & below debt worldwide fell to 8.58% this week, the same investors were getting 3 years ago on BB debt” -BBG
— David Schawel (@DavidSchawel) May 16, 2014
Just a reminder, when the world was ending for munis last June, $MUB was around 100. It’s around 109 now.
— JD (@Munisrgood) May 16, 2014