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Many bond market analysts have been left “all shook up” by the bond market this year, as yields fell when many thought they would rise, as the Fed pulls back on its bond purchases. But there is one firm in Memphis who did call it correctly.
Jim Vogel and Chris Low of FTN Financial, based just 11 miles from the gates of Elvis’s Home Graceland, were among a select few who correctly called the market, urging investors to ignore the general consensus for an inevitable selloff in bonds this year. Since at least 2011, FTN’s head of interest-rate strategies and chief economist have rightly gone against the pack by calling for low yields.
FTN says Treasuries are years away from reverting to pre-financial crisis levels as the labor market struggles. Getting it right has never been more important after a borrowing binge helped push the amount of debt globally to $100 trillion from $70 trillion in 2007.
“If you don’t expect interest rates to go back to where they were in the last cycle, you’re essentially asserting that something is very different in this cycle,” Low, told Bloomberg in an interview. “You can make that case more easily with every year that goes by when growth remains weak and several hundred thousand people fall out of the labor force.”
It might be a bit late, but the bond market consensus is coming around to the view of Vogel and Low. The year-end 10-year yield consensus has declined to 3.05 percent from 3.44 percent in January. Citigroup Inc. lowered its projection on June 27 to 2.95 percent from 3.35 percent, citing the Fed’s reduced estimate for the ultimate level of its federal funds rate target.
Todays Other Top Stories
LearnBonds: – Dividend cuts – when “bond equivalents” default. – As the ultra-low interest-rate environment of recent years became too much for some bond-focused investors to handle, the search for greener pastures shifted to the equity markets—specifically to dividend-paying bond equivalent stocks. The allure of blue-chip stocks paying respectable dividends and increasing those dividends on a regular basis can be difficult to resist. I have a healthy dose of dividend-paying stocks in my portfolio and love the inflation protection that comes from a rising income stream.
New York Life: – Opportunities in high yield municipal bonds. – Four reasons why high-yield municipal bonds may be currently attractive for income seeking investors.
Reuters: – Wilting municipal bond market to get meager supply next week. – The anemic U.S. municipal bond market will see more meager growth next week when only an estimated $2.45 billion municipal bonds are sold, the smallest weekly total issuance since January, according to Thomson Reuters estimates.
Morningstar: – Muni takeaways from the Morningstar conference. – Muni managers take sides in the Puerto Rico debate, address the bond landscape in Chicago, Detroit, and California, and discuss the advantages of CEFs in the muni space.
Bloomberg: – Puerto Rico default plan may spread pain beyond utility. – The U.S. municipal-bond market begins the week wondering whether the Puerto Rico Electric Power Authority, the commonwealth’s sole provider of electricity, will pay bondholders tomorrow after lawmakers last week enacted debt-restructuring legislation.
Bloomberg: – Cash spurs muni rally at 2014 midpoint after worst month. – Municipal-debt investors are betting the year’s biggest increase in yields will prove a temporary setback as a wave of cash returning to bondholders revives the strongest start to a year since 2009.
Larry Swedroe: – Do lower investment-grade municipal bonds add value? – Investors who need better returns than high-quality bonds will provide should adjust their portfolio’s equity allocation, not stretch for yield.
Reuters: – U.S. bond funds sue Puerto Rico, worried about bankruptcy threat. – U.S. mutual funds holding about $1.7 billion in Puerto Rico debt have sued the cash-strapped commonwealth, accusing the Caribbean island of passing an act modeled after the U.S. bankruptcy code in what could be a potential threat to American investors.
InvestmentNews: – Muni bond funds face ongoing Puerto Rican woes. – Two top bond fund managers are suing Puerto Rico, arguing a plan by lawmakers that could provide relief on some debt obligations violates the U.S. Constitution.
FT: – Fed has grown complacent on credit market risk. – “High-yield bonds have certainly caught our attention,” Janet Yellen, Federal Reserve’s chairwoman, remarked after the US central bank’s June policy meeting. “There is some evidence of ‘reach for yield’ behaviour.” Yet, the Fed’s broader message to investors was clear: we are not concerned and we will keep interest rates low; keep on dancing. I believe this is a policy error. The Fed is underestimating a build-up of risk in credit markets which is threatening financial stability.
Businessweek: – Fed shelters investors from full cost of bonds selloff, BIS says. – The Federal Reserve has taken some of the sting out of selloffs in Treasuries through its accumulation of government bonds, according to the Bank for International Settlements.
Think Advisor: – Bond market sweet spot. – In one of 2014’s most confounding developments for Wall Street’s army of analysts, bonds are outperforming stocks and long-term U.S. Treasuries are leading the way. At the start of the year, few observers expected this trend.
FT: – Long-dated U.S. debt emerges as one of big 2014 winners. – Long-dated US sovereign bonds have emerged as one of this year’s strongest performing assets, eclipsing gains in the benchmark S&P 500 stock index and commodities including oil and gold.
Reuters: – Finding a soft landing when bond prices fall. – Contemplating the end of a 30-year bull run in bond prices is a bit like waiting to go to the dentist for some long-needed procedure. You know it needs to happen, but you procrastinate.
Business Recorder: – Long yields hit three-week lows. – US Treasuries yields dropped on Thursday as traders eyeing a possible slowing of American economic growth drove up prices for a fourth straight day. Yields of 10- and 30-year Treasuries touched three-week lows as investors, already surprised on Wednesday by data showing the US economy contracted more than previously thought in the first quarter, reacted to data showing short-of-forecast increases in US consumer spending.
WSJ: – U.S. Government bonds set for quarterly price rally. – Treasury bonds strengthened on Monday, headed for the second straight quarterly rally that continues to confound bears expecting prices to sell off.
Investment Grade Bonds
Businessweek: – Ontario regulator to review corporate bond market Transparency. – The Ontario Securities Commission said it will review corporate bond trading practices to determine whether it should take a more active role to ensure transparency in the C$57 billion ($53.4 billion) market.
Fidelity: – Corporates not pricey, regulations make bank bonds best. – Demand for investment grade corporate bonds may be high, especially from pension funds, but the asset class is not too pricey, said David Prothro, portfolio manager for the Fidelity Corporate Bond Fund.
WSJ: – Spreading unease in corporate bond markets. – Drivers know the cautionary phrase “objects in the mirror are closer than they appear.” Buyers of corporate bonds should bear it in mind when looking at spreads, or the extra yield company debt pays over government debt. They may not be as generous as they look.
Income Investing: – Corporate bonds ‘fully valued’ but high yield better than high grade – RBS. – Keeping with the theme of my previous post, RBS weighs in today on whether the generally rich state of corporate bonds means they’re in for a fall after their strong first-half gains, or if the same powerful technical forces can continue to keep them afloat.
High Yield Bonds
Houston Chronicle: – Shale’s junk debt could get shaky if Fed raises rates. – Independent oil, gas producers still dependent on the risks that come with speculative-grade bonds.
Futures: – Are junk bonds the new (old) bubble? – The zero interest rate environment has created complacency and a reckless desire by investors of chasing yield into the riskiest spectrum of the financial markets. The chart below is the history of junk bond yields dating back to their beginning as an asset class, illustrates this.
MarketWatch: – More secured bonds in U.S. high yield default mix. – Secured bonds have been more visible in the high yield default mix in recent years, comprising 49% of defaults by par value and 41% by issue count since 2010 compared with just 13% and 12%, respectively, over 2000-2009, according to Fitch Ratings.
Wisdom Tree: – The emerging markets 50/50: Yields & volatility. – The emerging markets (EM) represent great valuation opportunities and some of the highest income levels, but they also represent significant volatility. One strategy that may help investors capture yields and mitigate volatility is to blend EM equities and EM corporate bonds.
Reuters: – Emerging bond sales surpass $260 billion in first half 2014. – Emerging market borrowers sold over $260 billion worth of bonds in the first half of 2014, outstripping year-ago levels despite geopolitical noise as borrowers rushed to take advantage of lower-than-expected U.S. yields.
Russ Koesterich: – Mid-year check-in: 5 portfolio moves for the second half. – Though 2014 so far has seen a number of surprises, the year has played out mostly according to the 2014 outlook my colleagues and I laid out late last year.
WSJ: – Six alternatives to high-yield bonds. – We recently ran a search for stocks that should appeal to junk-bond refugees. The six names below have current yields of more than 2% and, more important, potential for peppy growth in earnings and dividends in coming years.
The Tennessean: – Arithmetic, common sense required for sensible investing. – Sound investing begins with a careful assessment of risks and benefits. That requires a willingness to do basic arithmetic. Sadly, an enormous number of people just lose it when confronted with arithmetic. Worse, many hate paying taxes even more than they hate basic arithmetic. Many of those people are the proud owners of municipal bonds or municipal bond funds — even though that ownership won’t benefit them in any way.
MarketWatch: – First trust launches actively managed short duration high yield bond ETF. – New ETF Provides Currency Hedged and Duration Managed Exposure to High Yield Corporate Bond Market.
Gross: Gordon model: P = D/r-g. If “r” declines more than “g,” then stocks & other financial assets less bubbly. PIMCO’s “New Neutral.”
— PIMCO (@PIMCO) June 30, 2014
Have gone from “muni analysts broadly consider the move a credit positive” on Friday to “I have lost all faith in PR govt” today in press.
— Kristi Culpepper (@munilass) June 30, 2014
— Cate Long (@cate_long) June 30, 2014