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The global economy is in a world of transition. As growth recovers to modest levels in the U.S. and Europe, it is beginning to slow in China. Scott Mather, Deputy Chief Investment Officer for global bonds and emerging markets, at PIMCO explains.
“As China seeks to lessen its reliance on credit, we expect economic growth to slow from just over 7% to about 6% on average over the next three to five years.” Said Mather. Who went on to say. “We expect to see a more balanced economy going forward”.
To see a list of high yielding CDs go here.
What are the investment implications for global bond investors?
Mather says the biggest implications for investment portfolios is interest rates. “Our call is for interest rates to go up over the secular horizon, but not as much as people fear.” said Mather. All around the developed world, we are describing an environment in which 0% a real rate would be a gravitational force. As a result, the equilibrium level of interest rates all along the yield curve has also dropped vs pre crisis levels.
Investors who can draw on the global opportunity can diversify away from countries where broad estimates are wrong about the path of central bank rate setting and focus on countries where markets have overshot relative to what policymakers are likely to deliver.
Where are the opportunities for global investors?
Beyond China, emerging market growth will improve – although it will be a slow trip back to potential levels. Mather says that sovereign debt metrics look good in several countries, including Brazil and Mexico.
Australia is another country to watch according to Mather. Given its dependency on China as a buyer of its commodities. Australia is attempting to re-engineer its economy toward domestic demand-driven-growth.
You can read Scott Mather’s full interview here!
Todays Other Top Stories
Daily News: – Financial firms scale back New York municipal bond holdings fearing proposed teachers’ contract could raise deficits. – UBS Global Asset Management slashed allocations for New York City bonds by half for most of their wealthy clients’ portfolios. The Atlanta-based RidgeWorth Capital Management Inc. has also pared down its holdings, Bloomberg reported.
Reuters: – Junk muni funds shine from land, leverage and Detroit sewer bets. – After Detroit filed for bankruptcy last summer, portfolio managers at Eaton Vance municipal bond funds saw a gem hidden in the plumbing of the beleaguered Midwestern city.
Bloomberg: – Los Angeles county in smallest short-term issue since ’08. – Los Angeles County is poised to borrow $900 million in its smallest sale of short-term notes since 2008, signaling the financial recovery of the nation’s most-populous county.
Businessweek: – Wyden’s Build America Bonds reboot relies on cities. – On paper, Senator Ron Wyden’s idea to resurrect the Build America Bonds program would go a long way toward fixing the nation’s crumbling highways and bridges.
Intelligent Investing: – Muni bond manager’s journal: Pay attention to bond submarkets. – The municipal bond universe is $3.7 trillion in size, and while it’s often referred to as “a market”–as though it were singular and uniform–it’s actually comprised of a variety of submarkets; each of these has its own characteristics, advantages and pitfalls that investors need to understand before they invest.
Equus Private Wealth: – A booming Denver is good for Colorado municipal bonds. – The growing redevelopment of downtown Denver is creating a lot of excitement. The urban renaissance is picking up steam and hitting a high note this month with the grand re-opening of Denver Union Station as a regional transportation hub with new restaurants, retail, office spaces and the Crawford Hotel.
Cate Long: – Muni defaults and bond insurance: Part 3. – Municipal bond insurers have been working to regain market share. Insurers like Assured, National Public Finance and Build America Mutual have active sales forces that are placing large advertising campaigns in trade publications and were big sponsors at the recent National Financial Municipal Analysts conference.
WSJ: – Treasury bonds pare losses after disappointing labor, housing data. – Treasury bonds trimmed price losses on Thursday as the latest round of disappointing U.S. data in labor and housing markets attracted fresh buying into relatively safe U.S. government debt.
Investment Exchange: – Corporate bonds still favoured, despite tighter spreads. – Thomas O’Gorman, senior vice-president and director of fixed income at Calgary-based Franklin Bissett Investment Management, says he continues to emphasize corporate bonds, despite the fact that there has been a slight erosion in the fundamentals of corporate issuers.
High Yield Bonds
MoneyNews: – Investors flock to junk bonds, creating danger of blowout. – Investors are snapping up high-yield (junk) bonds like there’s no tomorrow, and that’s raising the risk of a market rout, experts say.
Businessweek: – Junk-Rated? Horribly illiquid? that’s perfect, i’ll buy them all. – It’s getting harder to trade bonds. Hours, sometimes days can go by before investors can complete a transaction. That’s not dissuading them from piling into the most-illiquid debt out there.
Reuters: – Amlin sees catastrophe reinsurance rates staying low. – British insurer and reinsurer Amlin Plc reported a 5 percent rise in quarterly gross written premiums in a tough market and warned of increasing competition in the U.S. catastrophe reinsurance market.
Trustnet: – What are the risks of buying a bond fund now? – With even fixed income managers themselves, such as Philip Milburn of the £1.7bn Kames High Yield Bond fund, saying the outlook for the asset class looks difficult, FE Trustnet looks at the reasons why.
Streamcastic: – How Fed chair Janet Yellen’s plans will affect your bonds. – Federal Reserve chair Janet Yellen said in early May that she expects to keep short-term borrowing rates low for a “considerable time.” She’s continuing to set a target of seeing healthy employment numbers and inflation around 2 percent before raising short-term rates above their nearly 0 percent levels. While short-term rates will remain low, long-term rates are another story.
CNBC: – U.S. bonds decline after Fed reassures on rate hike. – U.S. Treasury bonds continued to decline on Thursday, after minutes from the Federal Reserve’s latest meeting indicated no plans to hike interest rates soon. The minutes showed central bankers had discussed ways to normalize rates, but did not set out any concrete plans.
Global Post: – Prudential’s Greg Peters says bond yields signal recession possibility. – Greg Peters, the former Morgan Stanley chief global asset strategist who sounded an early alarm about the financial crisis, said on Wednesday there is currently a remote chance of another U.S. recession but bond yields are signaling a troubling scenario.
Think Advisor: – Rethinking the role of emerging markets investing in portfolios. – According to Tim McCarthy, U.S. investors invest too little outside their home country. Furthermore, in our view, too many investors have been conditioned to think that emerging markets rise and fall in lockstep with one another, and that the decision to invest is a binary one: they are either in or out of emerging markets. Going forward, we expect to experience more distinction between winners and losers in normal environments, and have adjusted our approach accordingly.
ETF Trends: – WisdomTree: Positioning for an Emerging Market rebound. – Most recognize that emerging market consumers will be important drivers of long-term global economic growth. However, emerging markets experienced short-term pain last year, and the performance out of the gate for this Index was challenged in the second half of 2013.
Focus on Funds: – Bonds, exotic markets top list of costliest ETF shorts. – The harder an asset is to find and trade, the costlier it’s going to be to short. This property helps explain why Markit finds a range of bond and emerging-market stock trackers atop the list of the costliest shorts in exchange-traded funds.
LearnBonds: – Mortgage refinancing jumps. – The mortgage refinancing gauge jumped 3.8% to the highest level since the week ended March 14. The purchase-applications measure fell 2.8%. Since the yield of the 10-year Treasury note broke below 2.70%, refinancing activity and home purchase activity have experienced role reversal.
ZACKS: – 2 ETFs hitting billion dollar AUM mark in May. – The U.S. ETF industry has been gaining immense popularity over mutual funds or any other alternative investment fund thanks to its transparency, liquidity, tax effectiveness and cost efficiency. As per the data from ETFGI, the ETF industry reached to a record high of $1.76 trillion at the end of April with 1,577 products from 57 providers on three exchanges.
Businessweek: – Finra fines JPMorgan 3 minutes of profit for errant bond reports. – The world’s biggest bond dealers, including JPMorgan Chase & Co. (JPM:US) and Morgan Stanley, failed to properly report trades to the industry’s price-tracking system more than 11,000 times. JPMorgan’s penalty: About three minutes of its annual profit.
John Dowdee: – Caution advised if investing in floating rate loans CEFs. – Floating rate loans CEFs are typically viewed as a hedge against rising interest rates. Floating rate loans CEFs have been more volatile than high yield bond ETFs.
FundWeb: – Bond funds: Who won and lost one year on from the taper tantrum? – Not one member of the IMA Global Emerging Market Bond sector has made a positive return in the year since tapering first entered the market’s consciousness on 22 May 2013.
Reuters: – S&P, BlackRock plan ‘smart’ bond indexes and funds. – Companies such as BlackRock Inc and Standard & Poor’s are taking a popular stock fund strategy and applying it to bonds.
This from @groditi sums up fixed income: “nobody wants to sell because they cant replace income. nobody wants to buy because too expensive”
— David Schawel (@DavidSchawel) May 22, 2014
Aggressive call *JANNEY SAYS MUNI DEBT SALES WILL DROP EVERY YEAR THROUGH 2017
— Brian Chappatta (@BChappatta) May 22, 2014
— Cate Long (@cate_long) May 22, 2014