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Bonds have been on fire so far in 2014. With every segment of the bond market—from sovereign to corporate to high yield to convertibles—delivering a positive performance, and without much dispersion between segments.
But it was Long-term Treasurys which came out on top, climbing some 11 percent year-to-date as rates have fallen about 50 basis points.
“Back during the scare of bonds in 2013 last summer, we thought bonds were bottoming out,” DoubleLine CEO Jeff Gundlach told investors during his monthly webcast. “It turned out to be right. In fact, the first four months in 2014 were the third-strongest total return for 30-year Treasurys dating back to 1974.”
“Some of that has been given up, but I think 30-year Treasurys will see lower yields before year-end,” he added.
So what’s driving the market? Gundlach argues there are many forces at work, and went on to detail four of these macro trends, during his call:
1. The U.S. dollar may lose its rank as global reserve currency, and its successor could be bitcoin.
Currency debasement is nothing new. Many currencies throughout history have faced debasement, and the U.S. dollar is no different. In fact, the dollar has lost 96 percent of its value since 1913, when the Federal Reserve was first established.
For the time being, Gundlach expects the dollar to bottom out near current levels, and potentially “break out on the upside.”
2. There are a lot of reasons for the drop in rates so far this year, and the upside looks limited ahead.
Treasury yields have been declining so far this year, with 10-year Treasury yields slipping below 2.50 percent at one point.
“Almost nobody believed interest rates could fall at all during 2014, let alone have one of the best asset classes this year be long-term government bonds”
The 10-year Treasury yield – currently 2.64% – is stuck in a range that won’t go higher than 2.8% anytime soon and could go as low as 2.2%, saying “the call for much higher Treasury yields seems premature.”
There are several reasons behind the rate decline; among them, pension plan demand for bonds as they took advantage of gains in equities in 2013 and rotated into fixed income. That rotation, however, is “largely behind us,” Gundlach told investors.
3. Key demographic issues are upon us right now, which means GDP growth will be low for a long time.
“Demographic changes in the developed world in the next 10 to 15 years are probably the most important thing in terms of secular investment thinking,” Gundlach said. “We are on the threshold of something really changing.”
4. China and emerging markets require a wait-and-see attitude right now, or an indexing approach.
The Chinese equities market, as measured by the Shanghai Index, has been relatively weak for the past four years or so, and in the past 18 months, the index has been range-bound, as if looking for something that will push it either to break on the upside, or toward new lows, Gundlach says.
“We should let the market tell its story to us, and use a follow-on type of investment approach at this time,” Gundlach said of investing in emerging equities.
You can read Gundlach’s full insight on these four macro trends here.
Todays Other Top Stories
LearnBonds: – For High-Yields – Should I invest in stocks or bonds? – While there’s no rock hard definition for the term, it seems in today’s interest rate world that any security sitting above 5% is considered “high-yield.” It’s funny when you think about it – considering where interest rates stood during Ronald Reagan’s presidency some 30 years ago.
Bernardi Securities: – The “Illinois effect” on local municipal bonds. – The State of Illinois’ fiscal problems are well known. The State receives widespread media coverage from having the lowest bond rating of any state in the country. Does this imply that all bonds issued by local governments within Illinois are poor credits? Not necessarily so, in our view.
Businessweek: – Chicago pension rescue targets $9.4 billion deficit. – Chicago moved forward in its effort to rescue a pair of pension funds and stabilize its finances when Illinois Governor Pat Quinn signed a bill that cuts benefits and makes employees pay more for retirement.
Yahoo Finance: – Eaton Vance: Muni rally will continue, don’t stretch for yield. – A lack of supply due to fiscal austerity and balanced budgets is boosting municipal bond prices in 2014, says Tom Metzold, portfolio manager for the Eaton Vance National Municipal Income Fund.
Bloomberg: – Brown tells Democrats to rein in California budget. – California Governor Jerry Brown, running for an unprecedented fourth term, says that if he can curb his fellow Democrats’ spending dreams, the most-indebted state may win its highest credit rating in five years.
Bloomberg: – Morningstar drops muni credit research. – Morningstar Inc., the Chicago-based investment information and services company, said it will no longer provide research on municipal bonds after June 30.
Trustnet: – Market worries will put emphasis back on absolute return funds, says Uys. – As well as focusing on cumulative performance, investors need to focus on how absolute return funds have performed when they’ve needed them the most.
Barry Ritholtz: – It’s a low rate world: Ritholtz chart. – Astonishingly, the U.S. has the 16th lowest yield. The 10-year U.S. Treasury bond yields a little more than Norway and a little less than Spain. I am not sure exactly what this means, but it seems worthy of further analysis.
Focus on Funds: – In Treasury bond ETFs, is the middle magnificent? – The view of exchange-traded fund buyers these days is that the middle is magnificent. If, by “middle,” we’re referring to the middle of the Treasury curve. Are they right?
Bloomberg: – U.S. Treasury seeks more information on bond positions. – The U.S. Treasury on Tuesday proposed expanding rules that require the reporting of large positions in U.S. government debt to include positions held by foreign central banks and governments, as well as to capture more interest rate derivatives contracts.
Investment Grade Bonds
FT: – Investors lap up ultra-long corporate bonds. – Global sales of corporate bonds maturing in 50 years have jumped to record levels this year as investors are flocking to the securities, lured by the higher yields offered by the debt.
CNN Money: – Investors hungry for riskier bonds. – Corporate bonds are in high demand. Investors are practically trampling one another to buy them. One measure of the appetite for these bonds is the “spread,” or difference in bond yields between corporate bonds (often seen as somewhat risky) and 10-year Treasury notes (one of the safest investments).
High Yield Bonds
Income Investing: – Junk bond default rate steady At 2.1% in May – Moody’s. – Junk-rated corporate bonds don’t yield much these days, but they don’t default much either. Moody’s just reported that the U.S. high-yield default rate held steady at just 2.1% in May, while the global rate fell to 2.3% in May from 2.5% in April. Things look pretty good for the year ahead too, according to Moody’s.
Income Investing: – High-yielding corporate bonds exist – In China. – Many investors who are tired of earning barely 5% in so-called high-yield corporate bonds in the U.S. are turning to China, where corporate bonds yield 1.2 percentage points more than equivalent U.S. bonds on average, according to a story in today’s Wall Street Journal.
Businessweek: – DoubleLine’s Baha says junk bonds on ‘overvalued side’. – Speculative-grade corporate bonds are on the “overvalued side,” according to Bonnie Baha, director of global developed credit at Los Angeles-based DoubleLine Capital LP, which manages about $50 billion.
Bloomberg: – Gross raises government-related debt to 50% of flagship fund. – Pacific Investment Management Co.’s Bill Gross raised his holdings of Treasuries and government-related debt in May to half his flagship fund’s total as the securities gained the most in four months.
PIMCO: – Seek secular staying power in global credit. – PIMCO’s Mark Kiesel discusses long-term themes that underpin opportunities and risks in global credit markets.
Wealth Management: – Bargains in closed-end funds? – During the past year, many closed-end bond funds sank as investors sold off, worried about rising interest rates. According to Thomas J. Herzfeld Advisors, the average closed-end bond fund now sells at a 6% discount to the value of its assets. In other words, you can buy $1 worth of bonds for 94 cents. That should tempt bottom fishers.
FT: – PIMCO hires high-profile Sundstrom as portfolio manager. – Geraldine Sundstrom, one of the most high-profile women in the European hedge fund industry, is set to join Pimco, the world’s biggest bond fund manager.
Gross: With German 10-year yields at 1.35 and relatively inert, they act as a magnet to bring U.S. Treasuries lower in yield.
— PIMCO (@PIMCO) June 11, 2014
JPM CFO with great color today on QE & deposits. QE increases bank assets & those will eventually leave as the Fed drains
— David Schawel (@DavidSchawel) June 11, 2014
Week 10-yr auction. Final yield 0.01% higher than pre-auction level. Dealer takedown greater than avg.
— AnthonyValeri (@Anthony_Valeri) June 11, 2014