To get the Best of the Bond Market delivered to your email daily click here.
The high yield rebound has continued this week following July’s pullback that saw a record $7.1 billion withdrawal from high-yield funds in a single week. Fund inflows have resumed and a benchmark Bank of America Merrill Lynch index is up 0.87% in the past week alone and 1.23% so far this month.
The average junk-bond yield has retreated to 5.34%, and the average spread over Treasuries is below 4 percentage points again at 3.85. The market’s 2014 year-to-date return has climbed back up to 5.53%.
To see a list of high yielding CDs go here.
The cause of the pullback, and whether it was warranted, is still being hotly debated by analysts, with Barron’s Michael Aneiro arguing that the junk bond market was overvalued and vulnerable heading into July. Which played a significant factor in the sell-off following this summers increase in geopolitical risks and continued weaker euro area growth.
Barclays strategists point out today that “These have led to a downdraft in risky assets and a rally in major fixed income markets that accelerated in late July,” Barclays writes. “Some of these moves are justified, in our view, but in other cases these shocks have created market dislocations that are worth exploiting.”
Ned Davis Research strategist Joseph Kalish and economist Veneta Dimitrova today echo the argument that the selloff was a liquidity problem rather than a credit problem. They point out that only a little over half of the sharp rise in high-yield spreads seen late last month was due to increased credit risk, with the rest due to other factors, specifically liquidity.
“Credit risk remains historically low,” Kalish and Dimitrova write. “As long as that’s the case, we will remain overweight credit risk and use corrections to add to those positions.”
The trick, of course, is recognizing these corrections and acting quickly enough to take advantage of them. As the high-yield market’s August performance shows, things get back to normal very quickly, and normal these days means a seemingly endless and effortless bull run.
Todays Other Top Stories
LearnBonds: – How much do bond funds really cost you? – Bond funds represent the easiest and most convenient way for fixed-income investors to access the bond market. Diversified amongst dozens, hundreds, or even thousands of individual issues, funds offer simplicity for those without the time, energy, or wherewithal to build bond portfolios of their own.
Financial Express: – Moribund munis. – The Narendra Modi government’s first ever budget was marked for its plans to reviving infrastructure investment in the country, and a key announcement was for developing 100 smart cities over the years. Finance minister Arun Jaitley called it Modi’s “vision” and allocated R7,060 crore for the scheme. He later said in Parliament that there would be more allocations in the coming budgets.
CNBC: – Are muni bonds safe? – Jeff Cox, CNBC.com finance editor, and Alexandra Lebenthal, Lebenthal & co-president and CEO, discuss the recent concerns surrounding municipal bonds and if a bond crises is looming.
Bloomberg: – Tax-free rally extended with August supply doldrums: Muni Credit. – The municipal-bond market’s record winning streak shows no signs of slowing. State and local debt has earned 0.8 percent this month through Aug. 18, on pace for the strongest August since 2011, Bank of America Merrill Lynch data show. Munis have gained each month this year, an unprecedented performance, pushing benchmark 10-year yields to the lowest since May 2013, according to data compiled by Bloomberg.
Reuters: – Detroit $5.5 bln bond sale readied as bond tender looms. – Underwriters for up to $5.5 billion of Detroit water and sewer revenue bonds released preliminary sale documents for the deals late on Tuesday as a tender offer for existing bonds continues.
FT.com: – Hedge funds spark review of Puerto Rico economy. – Hedge funds speculating on Puerto Rican bonds are claiming that a 60-year miscalculation of economic statistics may have caused investors to underestimate the island’s ability to pay down its $70bn of debt.
About.com: – The one event that will make or break the bond market. – If there’s one thing that virtually all investors can agree on, it’s that the U.S. Federal Reserve will raise interest rates at some point in 2015. What remains to be seen, however, is when the first rate hike will occur. The uncertainty surrounding this issue makes the question of timing – and not the first rate increase itself – the key to bond market performance in the coming months.
LPL Financial: – Bond market perspectives. – Geopolitical risks powered bonds to another weekly gain, but historically such gains have been short-lived and given way to other fundamental drivers. Low volume summer trading may keep bond yields pinned near year-to-date lows over the near term.
Market Realist: – Why bonds continue to make strategists look bad. – The roundup is a weekly series where we discuss the week’s trading in government bonds and to-be-announced (or TBA) mortgage-backed securities. We’ll see where mortgage rates have been. We’ll also go over the weekly economic data and earnings announcements. Then we’ll look forward to what’s coming up the following week.
The Trade USA: – High-yield bond volume calls ‘Great Rotation’ into question. – The spike in trading volume of high-yield corporate bonds over the past few weeks has some in the industry re-evaluating when or if ‘The Great Rotation’ will take place.
Wealth Management: – Treasury bonds may yield some ground. – Flows into and out of Treasury ETFs indicate bonds may soon be overbought.
MoneyBeat: – The economic implications of an end to 30 years of falling bond yields. – With 10-year Treasury yields at 2.4%, just above 14-month lows, the bond market is predicting that any rate hikes by the Federal Reserve will be gradual, and that any monetary tightening will settle in at much lower rates than in previous upturns in the policy cycle.
Morningstar: – Is the aggregate index too heavy in Treasuries? – Record Treasury issuances during the past decade have made the index more conservative than most intermediate-term bond funds.
Bloomberg: – U.S. Treasury yield curve flattens. – Bank of America Merrill Lynch Rates and Currency Research Head David Woo and Qorvis Mslgroup Executive Vice President of Communications Stanley Collender discuss Treasuries and the U.S. recovery on “Bloomberg Surveillance.”
FT Alphaville: – Foreigners abandon U.S. corporate debt. – Net foreign demand for US corporate bonds in the past five years seems to have moved inversely to net foreign demand for US long-term securities as a whole.
High Yield Bonds
CNBC: – One investor’s junk (bond) another’s treasure. – CNBC’s Jeff Cox, and Michael Kastner, Halyard Asset Management, discuss why retail investors are steering clear of junk bonds while institutional money is buying.
MNI: – Moody’s: Higher liquidity stress for HY issuers not worrisome. – Moody’s reported Tuesday that its Liquidity Stress Index, a leading indicator of speculative-grade defaults, rose to 4.1% in mid-August from 3.9% in July.
ValueWalk: – Low duration means low risk? Not necessarily. – To protect their portfolios from rising interest rates and volatility, many high-yield investors have headed for short-duration strategies. We think some of the more popular approaches may expose investors to bigger hazards than they realize.
Henderson: – Where next for high yield bonds? – Why did high-yield bonds sell-off? – Was it technically driven by uncomfortable valuations which investors perceived as too high, or was it more deep-seated, fundamentally driven by a worrying hike in defaults? Our belief is that it was the former and that it was necessary for the long term. The reasons are twofold.
Forbes: – The case for high yield. – Ever since the financial meltdown of 2008 bond rating agencies have suffered a severe credibility crisis among investors. Many factors played into their failure to warn us of the impending crisis, but I believe the most basic was that accounting is part art and part science.
S&P Capital IQ: – August rebound endures for high yield bond mart into 3rd straight week. – A rebound across the secondary high-yield market endures moving into a third consecutive week, as investors take advantage of some bargain pricing after the July correction, the first in 13 months. Although activity is typically summer-light, the expectation is, of course, for more action after Labor Day when accounts will be expected to put to work recent retail cash infusions to the asset class and their August-coupon inflows.
ICI: – Sizing up mutual fund and ETF investment in emerging markets. – Funds’ participation in the stock and bond markets of EM countries has indeed increased markedly in recent years. Nevertheless, funds hold a relatively small amount of the total value of stock and bonds of EM countries, which suggests that any concerns about the increased presence of funds in emerging markets could be overemphasized.
Businessweek: – Argentine bonds weaken on Fernandez plan to offer local-law swap. – Argentina’s bonds sank to a two-month low after the government said it plans to pay foreign-currency notes locally to sidestep a U.S. court ruling that blocked payments and caused its second default in 13 years.
Livemint: – Indian bonds rally on talk of foreign-investor buying. – Indian government bonds rallied on Wednesday amid speculation that foreign portfolio investors were active buyers, especially in 5-8 year debt, suggesting an improvement in the global risk appetite and a positive outlook on local bonds.
Economy Watch: – Emerging market bonds attract greater attention. – Argentina looks to avoid a U.S. court ruling that forced the nation into default while the Bank of China announced a sale of $5 billion worth of subordinated bonds. Both markets have seen a flood of liquidity and attention from investors as low yields in developed markets urge bond buyers to invest further afield.
Market Realist: – Why knowledge is important for sovereign risk assessments. – Overseas government bonds, or sovereign bonds, can provide investors with a source of stable income. Due to differences in economic cycles and monetary policies across countries, they can also provide valuable diversification benefits to your bond portfolio.
ETF.com: – Bull or bear, focus on asset allocations. – As a quantitative firm, we generally refrain from waxing philosophical about economic conditions and policy. We subscribe to the theory that markets are chaotic—while trends emerge and persist, predicting those trends is nearly impossible.
Zacks: – 3 ultra safe bond ETFs to dodge market turmoil. – With the broader U.S. stock markets having gained a whopping 182% from its March 2009 lows, investors are getting increasingly anxious about the health of the markets and even fearing the worst. In fact, the concerns had started building up last year, when the Fed revealed its intentions of withdrawing support from the market.
Forbes: – Four short duration bonds with juicy yields. – Many say that bonds are overvalued. True. But so are stocks, real estate, art and collectibles. That is why for the rest of this cycle it’s smart to manage your bond volatility, also known as duration.
Adam Aloisi: – What, exactly, constitutes ‘yield chasing’? – As income investors continue to muddle their way through the challenges of a ZIRP environment, the term “yield chasing” has made its way into everyday investment vernacular. Along with “bubble,” “yield chasing” is probably the most common critical comment thrown at equity-income and bond investors. But what exactly does it mean?
Investment News: – Fidelity turns its nose up at unconstrained bond funds. – Many advisers like the funds’ flexibility when interest rates rise, but a Fidelity manager isn’t impressed.
Gross: Fed minutes today are important but the 10-year Bund (.98%) sets global market tone. ECB’s New Neutral may be 1%.
— PIMCO (@PIMCO) August 20, 2014
YTD returns: Loomis Sayles Bond 6.96%, DoubleLine Total Return 5.13%, TCW Total Return 4.33%, PIMCO Total Return 4.23%
— David Schawel (@DavidSchawel) August 20, 2014
If you could trade PIMCO today might be the day for a contrarian buy
— David Schawel (@DavidSchawel) August 20, 2014