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If you’re confused by the way the bond market is trading at the moment, you’re not alone. Unprecedented stimulus by the Fed has rendered many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion.
With the world’s biggest economies struggling to grow and inflation nowhere in sight, catchphrases such as “new neutral” and “no normal” are gaining currency to describe a reality where bonds are rallying the most in a decade. When most people thought they should be falling.
Traditional models are failing to explain the resilience of fixed-income assets as central banks led by the Fed pump trillions of dollars into their economies and suppress short-term rates at historical lows.
“The biggest mistake for people is they think interest rates are merely a projection of where the economy is supposed to go,” Bianco said. “It’s the Fed and the way they have changed the marketplace.” He foresees that yields on 10-year notes will end the year at 2 percent to 2.5 percent.
Fed Chair Janet Yellen said on May 7 there will be “considerable time” before the central bank raises its benchmark rate as slack in the jobs market keeps inflation below its 2 percent target.
“Given the outlook for the global economy and inflation, bonds are not a bad place to be,” Gary Pollack, the New York-based head of fixed-income trading at Deutsche Bank AG’s private-wealth management unit, which oversees $12 billion, said in a telephone interview on May 28.
Todays Other Top Stories
Yahoo.com: – Looking for yield? Don’t go here. – Everyone is yearning for yield, and that has helped the once struggling muni market. Lipper data shows $3.1 billion has been invested into tax-exempt funds this year. That’s up from the previous year and marks a significant departure from the excessive selling that plagued munis for much of last year. So are they a buy?
Morningstar: – Where to look for cheap muni funds. – As a whole, municipal-bond closed-end funds are not screaming bargains at current valuations, but they look fairly cheap on a relative basis.
Reuters: – California notes push U.S. munis sales to $8.6 bln. – Sales of U.S. municipal bonds and notes next week will total more than $8.6 billion, up from a revised $5.1 billion during this shortened holiday week.
Gwen Moore: – Regulators urged to reconsider muni bonds as high-quality assets. – A pair of Democratic lawmakers want federal regulators to reconsider proposed rules that would keep municipal bonds from being considered “high-quality liquid assets” under enhanced liquidity standards for large banks.
Bloomberg: – N.Y.’s Suffolk county selling most bonds since 2011. – New York’s Suffolk County, home to the Hamptons beach communities, is offering its biggest bond sale in three years to finance projects from dredging its waterways to building classrooms.
ETF Trends: – Muni bond ETFs’ moment in the limelight. – After the Detroit’s bankruptcy hindered demand, municipal bonds, along with related exchange traded funds, are posting robust gains on huge inflows.
Bloomberg: – Puerto Rico as worst debt gives best return. – Puerto Rico is staging its longest rally in a year as the struggling U.S. territory’s speculative-grade bonds lure investors escaping from tumbling yields.
FA: – Brokers under fire from SEC over commissions on muni-bond trades. – Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, according to a member of the U.S. Securities and Exchange Commission.
FA Mag: – Gauging fair price for muni bonds to get easier. – The Municipal Securities Rule Making Board said Monday it will be making gauging the fair price for infrequently traded municipal securities easier next week with a new Web tool allowing investors to compare prices of similar bonds.
Businessweek: – Bond, stock rally shows need to be prepared (to Be Wrong). – During the first two World Wars, Boy Scouts sold U.S. bonds to help finance the fighting. If they were still at it today, there’d be a lot of merit badges to pass out globally after every bond market in the world rose in May.
Reuters: – U.S. bond market faces possible reckoning. – The rally in U.S. Treasury bonds surprised many, taking 10-year yields to their lowest levels in 11 months. Jobs data and the European Central Bank meeting next week will determine whether bond prices have further to go.
MoneyBeat: – As U.S. stocks soar, bonds offer a warning. – As stock indexes hit records last week, the bond market was waving warning flags. But bond investors have been shifting toward havens, notably U.S. Treasury bonds, a preference that often points to expectations that economic growth will falter.
Bloomberg: – Bond investors wary of yield trap heeding ECB alert. – Europe’s biggest fund managers are heeding policy makers’ warnings that an “excessive” search for yield is making bonds from companies in the region’s most indebted countries vulnerable to a selloff.
Wowow: – 5 Reasons for the growth of U.S. Treasury bonds. – U.S. Treasury bonds are rising again , and the yield on 10 – year bonds is reduced. At yesterday’s auction yield reaches a minimum level of 2.4 %.
Barron’s: – Yields fall, reasons abound. – A group of blind men trying to describe an elephant might have better luck than a gang of bond analysts trying to explain exactly why Treasury yields keep falling.
WSJ: – U.S. Government bonds rise in May. – Treasury bonds posted the biggest monthly price rally since January, though prices pulled back Friday as investors cashed out some chips.
WSJ: – Treasury bonds start june on down note. – Treasury bonds started June on a down note Monday morning after a strong rally in May as an upbeat report from China sapped demand for safety assets.
High Yield Bonds
Income Investing: – Leverage is rising, but junk bond defaults not yet imminent – Citi. – Citi this week explores where we are in the current credit cycle and says that absent some unexpected shock, it expects defaults to remain very low into 2016. While leverage is rising, it still lags peak levels seen in 2006 and 2007.
Market Realist: – Must-know: Will Tesla Motors’ issuance be adding to the junk bond flows? – It appears that Tesla Motors (TSLA) will now be adding to the high-yield bonds segment flows with any new debt issuance.
FT: – High-yield bond bubble feared. – Fears are mounting of a potential bubble in the high-yield bond market, where a rash of new buyers has pushed prices close to record highs, despite worries over market liquidity.
Columbia Management: – From tactical to core – The case for emerging market debt. – For many investors, emerging market debt could be viewed as a core-portfolio holding rather than a short-term tactical investment.
FT Adviser: – Beyond tapering: Divergent emerging market trends. – Emerging markets have struggled since the U.S. revealed plans for the ‘tapering’ of its quantitative easing programme last year, as many emerging markets had benefited from inward investment as a direct result of the looser monetary policy.
Palm Beach Daily: – Should you bet against Florida hurricanes? – As hurricane season starts today, Florida’s own Citizens Property Insurance is sponsoring the largest single catastrophe bond issue in history.
LearnBonds: – CDs offer attractive relative value. – In an investing world in which there is very little value to be found, investors who are desperate to put cash to work will have to settle for relative value. By relative value, I am referring to the attractiveness of one investment relative to another, rather than relative to historically attractive valuations and yields. Concerning fixed income, relative value can be found in 7- to 10-year certificates of deposit (CDs).
Kiplinger: – The bond rally isn’t over. – Bonds are no riskier today than they were a year ago. If you own them for current income and diversification, stand firm.
ETF Trends: – State Street, Gundlach to partner on active ETF. – State Street’s (NYSE: STT) State Street Global Advisors, the second-largest U.S. issuer of exchange traded funds, and Jeffrey Gundlach’s DoubleLine Capital LP are partnering to launch an actively managed fixed income ETF.
NASDAQ: – Falling interest rates boost bond ETFs. – The yield on the 10-year U.S. Treasury fell to an 11-month low on Wednesday and the drop continued into Thursday — as the yield is on the verge of breaching the 2.40 percent level.
Seattle Times: – When it comes to mutual funds, be a cheapskate. – Mutual-fund investors should only pay above-average expenses under three circumstances: You have no choice, it’s a new fund, and you can reasonably expect returns to justify oversized payments.
ZACKS: – Top-ranked corporate bond ETF in focus. – The entire set of corporate bond ETFs has returned smartly this year approaching almost double-digit gains while the S&P 500 Index has returned about 3.0% thus far. Thus, a look at the top-ranked ETF in the Corporate Bond space would be the best way to capture the uptrend and cater to investors seeking higher yields without too much extra risk. So which ETF does Zacks rank as number one?
ETF Trends: – Mortgage REIT ETFs look attractive in subdued rate environment. – The unexpected fall in interest rates this year has helped high-yield real estate investment trust exchange traded funds generate strong gains, and with the Fed maintaining low rates, the sector may still have room to run.
Reuters: – Pimco Total Return rose 1.25 percent in May. – The Pimco Total Return Fund, the world’s largest bond fund run by Bill Gross, rose 1.25 percent in May, beating 79 percent of its peers, preliminary Morningstar data showed on Monday.
— Cate Long (@cate_long) June 2, 2014
Not as many shorts in USTs… Ultras back to the lows. — Ed Bradford (@Fullcarry) June 2, 2014
— Cate Long (@cate_long) June 2, 2014