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Not a day goes by at the moment without one analyst or another warning of the potential risk of bond markets capitulating if investors flee on mass, once interest rates start to rise.
And today it’s the turn of emerging bond markets. According to the Financial Times, some analysts are warning the secondary EM bond market, where bonds that have already been issued are bought and sold, is at risk of seizing up if investors sell-off EM assets when U.S. interest rates start to rise.
The flood of global liquidity provided under quantitative easing by the US Federal Reserve and other central banks has supported a huge increase in bond issuance by EM governments and companies. According to the FT. Such issuance was already on the rise before the global crisis of 2008-09, as new investors came to emerging markets in search of higher yields.
So, what might happen if investors in EM debt decided to sell in large numbers? Just the prospect of less QE was enough last year to trigger a sell-off that spread swiftly to EM currencies. And, while some big real money investors, such as sovereign wealth funds, could choose to ride out a repeat episode, others such as mutual funds may not have that choice.
Todays Other Top Stories
LearnBonds: – Puerto Rico debt restructuring. – Puerto Rico seeks to restructure debt backed by utility and highway revenues. In the bond world, a debt restructuring is tantamount to a default as it almost always results in affected bondholders receiving less than par and cessation of interest payments. Haircutting investors could provide significant relief to Puerto Rico’s balance sheet. Of course, if the Commonwealth cannot solve its woes, further bondholder-unfriendly actions could occur.
NY Times: – S.E.C. stops city in Illinois from selling municipal bonds. – Federal regulators went to court on Wednesday to keep a city in Illinois from bringing its bonds to market, an unprecedented step they called necessary to halt a widening securities fraud.
The Nation: – $1.5tn worth of global bonds issued in first five months: S&P. – Global corporate new bond issuance has been robust in the first five months of 2014, totaling US$1.5 trillion, but remains lower than the nearly $1.6 trillion issued during the same period in 2013, according to Standard & Poor’s Ratings Services.
Kiplinger: – What’s driving the boom in bonds. – The bond market has been able to outwit even the best investors lately. In 2011, for example, legendary bond investor Bill Gross famously dumped Treasuries in his Pimco Total Return fund, believing yields were due to rise sharply. That year, the Barclays U.S. Treasury index rallied 9.8%. And in 2013, Gross loaded up on Treasury bonds, just as the market was about to tumble. So while we can’t predict what’s next, we present eight questions and answers to explain the mysterious ways of the bond market.
Zacks: – Zacks #1 Ranked government bond mutual funds. – Zacks top 5 rated government bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all government bond funds.
USA Today: – True contrarians invested in long-term government bonds this year. – Most people fancy themselves contrarians: Bold, innovative thinkers who bravely do the opposite of the thundering herd on the street. This year, those are the people who invested in long-term government bonds.
WSJ: – U.S. Government bonds rise. – Treasury bonds rose for a fourth straight session Thursday as U.S. data cast doubt over how robustly the U.S. economy would grow this year.
Investment Grade Bonds
Market Realist: – Corporate debt trends—have high-yield investors had enough? – While investor flows in high-yield and leveraged loans (BKLN) mutual funds were negative, investment-grade mutual funds reversed last week’s trend with net inflows of over $1.9 billion in the week ending June 18 (Source: Lipper). We had talked about the possibility of reversals in investment-grade flows this week in our last corporate bonds update.
High Yield Bonds
Citywire: – Blockbuster bond manager reveals HY ‘no go’ zones. – Global high yield is in good shape but there are still several pockets of the market investors should steer clear of, according to blockbuster bond manager Russ Covode.
IFR: – U.S. high-yield bond market on fire. – Energy companies are meeting strong demand in the US high-yield bond market, with recently listed Memorial Resource Development (MRD) Corp becoming the latest Wednesday to price a deal.
Citywire: – Bond veteran Roberts: high yield rally could last two more years. – US bond veteran Dan Roberts believes the rally in high yield could last for a further two years, despite the huge rise enjoyed by the asset class since 2009.
FT Adviser: – Confidence in EMs halves in two years. – Confidence in emerging market investment returns has plummeted in recent years, according to a major survey of global asset managers.
Reuters: – Santander says correction in Latin America bond market ‘inevitable’. – According to Santander Investment Securities analysts led by Aaron Holsberg, a correction in prices of Latin American corporate debt is “inevitable,” although the market is grinding “tighter and tighter” and has more upside room in the short term.
Dividend Channel: – Frank Bifulco’s top picks from the retiree income portfolio. – Frank Bifulco pick’s seven high dividend producing stocks for retirees looking for income.
FT Alphaville: – Bonfire of the bond funds. – There is a potential lag, or variation, between the preparations of bond fund managers and the vast changes that have occurred in bond market structure. Responses to those changes are so far being made on the margins — more cash buffers, more disclosures, some experiments with new electronic bond trading platforms — while pretty much nothing is being done to address the fundamental causes of the lack of market liquidity.
Fox Business: – 3 Overseas income ETFs to boost your portfolio yield. – The search for yield has ETF income investors turning their focus away from high-priced U.S. assets to more attractive opportunities overseas.
Chris Ciovacco: – Is it time to sell stocks and buy bonds? – Weaker than expected GDP figures raise legitimate concerns about the U.S. economy. As shown via a 2008 example, if bonds are the better place to be, there are ways to monitor the defensive shift. Examining the present day information provides a basis for answering the bonds vs. stocks question.
Citywire: – Bond funds blown open: inside the bumper crop of new launches. – For all the talk of the great rotation, this past quarter has seen a array of new bond funds launched. Citywire Global digs deeper into trends and themes behind this fixed income frenzy.
Morningstar: – 3 Good funds with big credit risks. – Don’t expect funds that have fared well during the rally to hold up during a correction. The Morningstar Medalists below placed in the bottom half of either the high-yield bond or bank-loan categories in 2008 but fared much better in 2009.
Gross: Is US really growing at 3% real? 2% for last 3 years. 10-year Treasury 2.4 – 2.8% range for 2nd half. “New Neutral.”
— PIMCO (@PIMCO) June 26, 2014
Mather, Deputy CIO: Bank of England rate hikes on the horizon – what’s your Gilty pleasure? One option: underweight Gilts, overweight #GBP.
— PIMCO (@PIMCO) June 26, 2014
Rick Rieder: Agree with Fed’s Lacker that labor market woes reflect structural changes “difficult for monetary policy to offset” @WSJecon
— BlackRock® (@blackrock) June 26, 2014