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The Federal Reserve is concerned about the possibility of a fire sale of bond funds should interest rates rise sharply, so much so that Fed officials are considering the possibility of the need to impose exit fees on the sector, according to a report by the Financial Times.
According to the FT, discussions have taken place at a senior level but no formal policy has been developed. Although implementing it is going to be problematic, since the Securities and Exchange Commission would have to change its rules, which some commissioners would be expected to resist, the report said, citing people familiar with the matter.
Since the financial crisis, a combination of new regulations and lower risk tolerance among banks has weighed on the dealer arms of banks, reducing the sizes of the balance sheets they once used to intermediate between buyers and sellers of bonds.
Whereas dealers would once take large blocks of bonds onto their balance sheets, cushioning the market impact of large outflows from bond funds, they no longer have that same capability.
That has underscored the fears among many market participants that the credit markets could be in for a rough ride if investors rush for the exits at once.
Todays Other Top Stories
LearnBonds: – Making sense of the markets. – Although the markets will be mainly focused on this week’s FOMC meeting (and the crazies intent on using violence and force of arms to achieve their aims), Tuesday’s economic data is much-watched by fixed income market participants.
The Spectrum: – Loans from 401(k) easy, but not worth it. – If thinking about investing in municipal bonds, you may have good reason, particularly if you are in one of the higher tax brackets.
Reuters: – Rhode Island lawmakers approve budget; to pay for Schilling bonds. – Rhode Island lawmakers approved an $8.7 billion budget on Monday that includes funds to pay for bonds issued on behalf of ex-Boston Red Sox pitcher Curt Schilling’s now-defunct video game company.
Bloomberg: – Bridgegate no toll on N.Y. Port Authority as yields fall. – The city of Detroit has reached new agreements with its largest municipal union and a separate settlement with a group of bondholders, likely reducing the number of creditors to oppose the city’s bankruptcy plan at a trial scheduled for this summer.
Bloomberg: – Treasury 2-year yields at 9-month high as Fed meeting begins. – Treasury two-year note yields reached the highest level since September as Federal Reserve officials begin a two-day policy meeting.
Bloomberg: – Treasuries drop on biggest price jump in year amid Fed. – U.S. Treasury 10-year notes fell after the cost of living in the U.S. increased the most in more than a year in May, a signal inflation may move closer to the Federal Reserve’s goal as policy makers meet.
WSJ: – U.S. Government bonds take a hit after CPI report. – Investors sold Treasury bonds on Tuesday as the latest gauge of U.S. inflation rose at the fastest pace in more than a year.
IFX: – China tops U.S. in corporate debt issuance. – China has overtaken the U.S. as the world’s largest corporate debt issuer, but a slowing Chinese economy and weakened financial conditions among its companies are causing overall corporate risk to increase globally, said Standard & Poor’s Ratings Services.
High Yield Bonds
Income Investing: – New record low for average junk bond yield: 4.9%. – The average yield across the U.S. junk-bond market is plowing into new all-time low territory again, and it doesn’t show signs of stopping anytime soon.
Mad Hedge Fund Trader: – Are junk bonds peaking? – There is no happier corner of the fixed income universe than junk bonds (JNK), (HYG), which have been soaring like a bat out of hell for the past four years. Average yields for the bond class most sensitive to the economy have collapsed from 18% to near an all-time low of 6%, a scant 315 basis points over ten year Treasury bonds.
MoneyBeat: – Chasing yield, investors plow into junk bonds. – Large investors are rushing into the riskiest corporate bonds, frustrated by low interest rates on safer investments and convinced that even companies with shaky finances are in little danger of default.
Reuters: – Low global yields, short memories propel frontier debt revival. – Investors are returning to the riskier, less developed bond markets of Africa and other frontier economies, burying memories of past setbacks and plunging in after global yields failed to rise as much as expected.
WSJ: – Flows return to emerging markets. – A fresh wave of investment inflows is taking the pressure off some emerging-market governments that had at long last started to tackle economic overhauls.
Bloomberg: – Buffett warning unheeded as catastrophe bond sales climb. – Bond buyers are betting more than ever on the mercy of Mother Nature as they seek to boost yields being suppressed by central banks.
Financial Post: – Optimistic investors chose equities, property, avoid bonds. – Global investors pumped up their holdings of equities and real estate in June and cut back on bonds, reflecting their more enthusiastic outlook for the world’s economy, a closely watched survey showed on Tuesday.
FT: – ‘Patient capital’ waits to exploit bond market sell-off. – Asset managers hoping to profit from bouts of bond market turmoil – now big Wall Street banks have had their wings clipped – have coined an unlikely new buzz phrase: “patient capital”.
Money Observer: – Fund Awards 2014: Best global bond funds. – In a market plagued by rock-bottom sovereign bond yields and increasing concerns over rising interest rates in developed markets, the Legg Mason Brandywine Global Fixed Income fund achieved more than double the return of the global bond sector over three years.
Morningstar: – 3 New non-traditional-bond funds leap into the fray. – Janus, DoubleLine, and Goldman Sachs are among the latest to try their hand at strategies that aim to defy rising interest rates.
William Baldwin: – Best ETFs – Inflation protected bonds. – These funds own Treasury Inflation Protected Securities—Treasury bonds and notes whose principal and coupon payments step up with the cost of living.
Rick Rieder: Rising inflation gives Fed window for faster rate hike. Long-term, inflation to keep long bond yields contained vs. short ones
— BlackRock® (@blackrock) June 17, 2014
2-yr Treasury yield approaching Sept 2013 peak. Rise in short-term Treasury yields reflects nervousness ahead of Fed tmrw.
— AnthonyValeri (@Anthony_Valeri) June 17, 2014
3-yr Treasury yield surpasses taper-tantrum sell-off high seen in early September 2013
— AnthonyValeri (@Anthony_Valeri) June 17, 2014