To get the Best of the Bond Market delivered to your email daily click here.
The bond market is often used as a barometer for the strength of the overall economy. Unfortunately, its message has gotten a little mixed lately. Many analysts are at a loss to explain why Treasuries are rising in the face of a slight rise in inflationary pressure.
But that hasn’t stopped a few trying. Bill Greiner, CIO of Mariner Wealth Advisors, has a theory. “While I too am somewhat surprised by this counter-rally in bonds,” Greiner said. “Investors need to keep in mind where interest rates were 18 months ago.”
Rates (as measured by the U.S. Treasury 10-year Bond) bottomed at 1.3% early in 2012. Subsequent to this bottom, rates rose to slightly over 3.0% by the beginning of this year, representing an increase of 170 basis points.”
Since then, rates have fallen by 55 basis points, about a third of the upward move we witnessed in rates from the lows in 2012. This “backfilling” is not unusual for any market which has generated large moves – either upward or downward.
“With falling interest rates, some are concerned that the bond market is “talking” to us…
…and perhaps telling us the weak growth of the first quarter wasn’t simply a fluke of inventory write-down and weather.”
We need to keep in mind the Fed’s Quantitative Easing activities. While tapering is in effect, the Fed is still buying billions of bonds per month, directly influencing many capital markets. So, while in some investors’ minds the bond market is portraying continued economic weakness, the Fed’s activities are altering the ability of the market to simply be the market. The fundamental stuff of slightly higher interest rates in the future is still present.
You can read Greiner’s full article and market outlook here.
Todays Other Top Stories
LearnBonds: – Junk bond credit spreads reach their lowest levels since financial crisis. – When we see investors scramble to take subordinate positions in already risky assets, we cannot help but to become concerned that junk debt is overvalued.
Reuters: – New York City gets low yields in first bond sale since union deals. – A scarcity of new paper in the U.S. municipal bond market helped New York City borrow more at lower rates on Wednesday, in its first bond deal since Mayor Bill de Blasio’s multibillion-dollar accord with labor unions in May.
Cate Long: – Another tool to make people more comfortable. – After the launch of the MSRB’s new price discovery tool on EMMA I chatted with Executive Director Lynnette Kelly about it and other transparency initiatives. Kelly led the launch of the EMMA website in 2008 and she has continued to champion its expansion to increase transparency in the municipal market. Kelly said that the new and better EMMA was “another tool to make people more comfortable owning municipal bonds.”
Bloomberg: – Newark left with stadium bill after ball club folds. – Newark, New Jersey, where more than a quarter of residents live in poverty, is stuck paying $1 million a year on bonds for a baseball park that’s lost its main tenant.
Bloomberg: – Detroit agency plans bond sale to fix street lights. – An agency created to illuminate bankrupt Detroit plans to borrow $185 million to improve street lighting, according to a Standard & Poor’s analyst.
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.
WSJ: – Behold the burrito bond. – Bond bubble? What bond bubble? These bonds give out free burritos! London high street fast food outlet Chilango, favored by City types with elastic waistbands, is offering an 8% coupon on a four-year corporate bond that gives some buyers a free burrito* every week for the lifetime of the debt.
PIMCO: – Just give me a framework. – Paul McCulley, Chief Economist, explains the evolution of Fed policy and the secular New Neutral.
Bloomberg: – U.S.’s $21 billion notes sale undermines budding rally. – Foreign investors showed the least demand for Treasury 10-year notes at a U.S. auction of the debt in 13 months, suggesting that the biggest bond-market rally in three years risks running out of steam.
Bloomberg: – Treasuries rise as growth slows amid safety bid on Iraq. – Treasuries rose for a second day as reports signaling that the economic recovery remains uneven and escalating violence across Iraq boosted the refuge appeal of U.S. government debt.
Investment Grade Bonds
Donald van Deventer: – Bank Of America Corporation: Default probabilities and relative value update. – Bank of America default probabilities have increased significantly since our March 7, 2014 report. Credit spreads are average and default probabilities are above average compared to banking peers and investment grade peers, giving below average credit spread to default probability ratios.
High Yield Bonds
Investopedia: – Will the high times in high yield continue? – With interest rates still in the basement and Treasury bonds yielding next to nothing, investors have been forced to look outside the box in order to find income. For those wanting to stay within bonds, that means loading up on junk bonds and funds like the SPDR Barclays High Yield Bond ETF.
Moody’s: – EMEA high-yield market remains set for another record year, as private equity IPOs continue. – With high-yield bond issuance of USD13.8 billion in May, and cumulative issuance reaching USD70 billion, 2014 looks well placed to set another issuance record says Moody’s in the June edition of its “High Yield Interest — European Edition” publication. Positive sentiment for the remainder of 2014 was also expressed at Moody’s high-yield conference on May 21.
Streetauthority: – It’s time to cash out of the junk-bond rally. – There are a whole host of factors leading to the current rally in junk bonds. Yet this perfect backdrop is bound to wither away, especially if rates on the 10-year Treasury note start to rise in the face of a continued strengthening in the U.S. employment picture.
Bloomberg: – Blackstone’s Goodman rooting for reversal in frothy junk market. – Blackstone Group LP (BX) is “rooting for a correction” in the junk bond market as yields descend to record-low levels.
Money Marketing: – Emerging markets return to favour with European investors. – Investors across Europe channelled money in emerging market funds during April in signs that the unloved asset class is coming back into favour.
MoneyBeat: – Forget Europe, emerging markets to gain most from ECB easing. – The European Central Bank has given investors an excuse to keep buying in emerging markets into the second half of the year, as a worldwide “hunt for yield” runs out of assets to buy in advanced economies.
Professional Adviser: – Where did all the smart money go in May? – Investors continued to direct their cash towards emerging markets in May. These new flows could partly be attributed to the paucity of opportunities available among developed market assets, but also to a diminution in the situation in Ukraine. Flows were seen into emerging market bond and equity funds, with investors even returning tentatively to local currency bond funds.
Citywire Global: – Hermes’ Lundie: too many managers stuck in low-quality, low-duration bonds. – Hermes Fund Managers’ co-head of credit Fraser Lundie is using his flexible mandate to move away from low-quality, short-duration bonds, which he believes have become a crowded play for too many bond managers stuck within strict bond mandates.
FA Magazine: – Gundlach sees dollar, gold rising as 30-year Treasurys trounce junk. – Weak first-quarter U.S. GDP growth isn’t the only reason why long-term Treasury bonds have climbed 11 percent so far this year, according to DoubleLine CEO Jeffrey Gundlach. There was a huge short position betting against U.S. Treasurys early in 2014 that helped fuel their outperformance.
Financial Post: – Bond ETFs surge in size and risk as institutions pile in. – Institutional investors having trouble finding bonds for their portfolios from the usual suppliers are accepting a higher degree of risk and pumping billions of dollars into exchange-traded bond funds, boosting asset management firms such as BlackRock, Pimco and State Street.
GROSS: Let’s see: -1% GDP for 1st quarter +3% for 2nd quarter. Avg 1% for 1st half. Must be weather or maybe the 5yr old New Normal.
— PIMCO (@PIMCO) June 12, 2014
CASHIN: Superstitious traders note that tomorrow is a full moon on Friday the 13th. Rather rare – last October 2000; the next not till 2049.
— Barry Ritholtz (@ritholtz) June 12, 2014
Strong demand for 30-yr bond auction. No surprise given global news flow today.
— AnthonyValeri (@Anthony_Valeri) June 12, 2014