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All the talk has been about high-yield (junk) bonds this past few weeks, while their investment grade cousins have been flying under the radar. But that hasn’t stopped Bill Gross from taking the opportunity to pounce.
Lisa Abramowicz for Bloomberg reports that BOND, the PIMCO Total Return ETF, the ETF version of the storied Total Return mutual fund, is snatching up investment-grade corporate bonds quadrupling its allocation to high-grade corporate bonds since January as some investors and market observers fret about the Federal Reserve raising interest rates in 2015.
To see a list of high yielding CDs go here.
BOND had a 38% weight to corporate bonds at the end of July, which represented 28% of the ETF’s duration, according to PIMCO data. Duration is the measure of a bond’s sensitivity to interest rate changes.
BOND’s increased exposure to corporate debt has come at the expense of Treasuries. PIMCO has cut its allocation to U.S. government related debt in its Total Return Fund (PTTRX) to 45% in July, compared to 47% in June and 50% in May, reports Susanne Walker for Bloomberg.
While BOND’s exposure to U.S. Treasuries is significantly lower at 16%. Gross, has been betting on short-term Treasuries, which have underperformed long-term debt this year. Total Return (PTTRX) shows a 6.21 year effective duration while BOND has a duration of 5.34 years.
BOND’s ability to pare Treasury exposure and its heavy tilt toward investment-grade company debt could help the ETF remain durable because funds with lower durations and robust high-grade corporate exposure can outpace broader fixed income indices in a rising interest rate environment when the economy is expanding.
Todays Other Top Stories
LearnBonds: – Evaluating the future of IBM. – Today, making machines – in this case, computers and their components – isn’t IBM’s core business any more. It’s computer software and services, and it’s aiming at the burgeoning markets for Cloud computing, Big Data and mobile applications for its business analytics software. Grasping the impact of that transformation is the key to evaluating the future of IBM.
FMSBonds: – Agreement helps buoy Puerto Rico bonds. – Buoyed by an agreement to extend the credit for Puerto Rico’s power authority, the commonwealth’s general obligation bonds are on the upswing.
Mihalek Law: – Excessive bond markups and markdowns. – Although there is no question that the broker/dealer is entitled to add a markup to the price it pays for the securities, the markup must be fair and reasonable. Whether that markup is fair and reasonable is determined on a case-by-case basis. A markup may be “excessive” when it bears no reasonable relation to the prevailing market price.
Reuters: – Hedge Funds in Puerto Rico’s power authority accord include Redwood, Knighthead – Hedge funds negotiating with Puerto Rico’s public power authority PREPA over a possible restructuring of more than $8 billion in bonds include two involved in Argentina’s protracted bond negotiations, Knighthead Capital Management and Redwood Capital Management, according to the full bondholder agreement published on Thursday.
Morningstar: – Low-cost exposure to taxable municipal bonds. – By investing in Build America Bonds, this fund gets exposure to taxable municipal bonds with interest payments subsidized by the federal government.
Doug Kass: – Love Muni Bonds – hate Social Media. – My favored asset class is still closed-end municipal bond funds, even though they are up by over 15% year-to-date. Discounts to net asset values remain in the high-single-digit area,d and after-tax and taxable-equivalent returns remain attractive.
Fox Business: – How the average Joe can invest in bonds. – Brean Capital managing partner Peter Tchir and FOX Business contributor Bob Rice discuss how to invest in fixed income.
Market Realist: – Why there is robust demand for U.S. Treasuries. – In the primary markets, the U.S. Treasury auctioned $171 billion worth of debt in the week ending August 15. Both short-term Treasury bills and longer-term Treasury notes and bonds were auctioned. Overall, demand was robust, with strong bidding evident from both domestic and overseas investors.
Business Standard: – New 10-year benchmark bond yet to become top traded security. – The old 10-year government bond has continued to be the top traded security in terms of volume, even after almost a month from the date of issue of the new bond, considered the new benchmark security.
Investment Grade Bonds
WSJ: – U.S. Bond issuance nears $1 trillion. – (Subscription required) U.S. corporate-bond issuance is hurtling toward a record for the third consecutive year, as companies take advantage of a surprising interest-rate decline to stock up on cash.
Advisor Shares: – An inefficient asset class. – We believe that credit ratings have created inefficiencies in corporate credit and an opportunity for those willing to step down on the ratings spectrum.
High Yield Bonds
Bloomberg: – Love affair with junk resumes with biggest inflows of ’14. – U.S. high-yield bond funds recorded the biggest weekly inflow of 2014 as investors returned to the riskiest corporate debt following an unprecedented withdrawal at the start of August.
WSJ: – U.S. Junk bond funds register second straight weekly gain. – (Subscription required) U.S. junk-bond funds registered a $2.2 billion inflow in the week ended Wednesday, according to fund tracker Lipper, their second straight weekly gain following several weeks of outflows starting in July.
ETF Trends: – Europe junk bond ETF sees big inflows. – After U.S. retail investors scampered out of high-yield debt exchange traded funds, there is evidence to suggest institutional investors have been buying up shares of those ETFs.
Citywire: – Three ways to tap the short duration high yield market. – The looming spectre of rising interest rates has forced many fixed income investors to shift allocations away from traditional areas of the market.
ETF Trends: – Stay in the high-yield game with this pair of bond ETFs. – For better and worse, exchange traded funds holding high-yield corporate debt have been in the spotlight quite a bit in recent weeks.
Business World: – World’s biggest wealth fund takes focus off emerging markets. – Norway’s €663bn sovereign wealth fund, the world’s largest, is slowing its expansion into emerging markets as it scales back a two-year mission to tap into the fastest growing markets.
Citywire: – Schroders fixed income chief: why I’m optimistic on Asian bonds. – A recovery in Asian bond markets is underway, according to Schroders’ Rajeev De Mello.
Zacks: – Argentina debt default: Are funds in trouble? – Last month, Argentina defaulted for the second time in 13 years on debt payments to “vulture fund” bondholders. After hours of negotiations on Jun 30, Argentina’s court-appointed mediator said Argentina would “imminently be in default” on debt obligations worth roughly $20 billion. This was the result of the decade-long legal battle between Elliott Management and the Argentine government. Argentina failed to pay interest payment of $539 million.
MoneyBeat: – Should bond investors move up in quality? – Should investors be buying bonds from higher-rated companies? Analysts at the Schwab Center for Financial Research, which provides guidance for individual investors, say the answer is yes.
The Economist: – My money or your life. – Over the past 50 years, every forecast of how long people will live has fallen short. Despite fears that obesity and global warming would reverse the trend, life expectancy in rich countries has grown steadily, by about 2.5 years a decade, or 15 minutes every hour (see chart). That is good news for health-care providers, cruise companies and (on the whole) humanity. It is most unwelcome for those paying the bills to finance this extended lease on life.
The Journal Times: – Investment Insights: Factoring market declines into retirement planning. – With stocks in the last week of July experiencing their biggest declines since January, it was an opportunity for all of the bears to crawl out of the woodwork to begin growling.
ETF Channel: – 10 most oversold ETFs. – These ten ETFs have been ranked as oversold in that they are trading below their 200-day moving average.
ETF.com: – Daily ETF Watch: FlexShares plans bond fund. – FlexShares, the ETF unit of Northern Trust, perhaps best known for its $3 billion Morningstar Global Upstream Natural Resources ETF, has plans to launch a fundamentals-based corporate bond ETF. While there is a slew of smart-beta equity ETFs on the market, the fundamentally weighted bond space has been slow to gain traction.
ETF Trends: – Investors like passive ETFs over active funds. – More investors want index-based investments and exchange traded funds, favoring passive fund products over actively managed strategies.
Focus on Funds: – Mutual Fund, ETF inflows at 10-month highs, junk bond fund sales pause. – Jefferies’ Kenneth Chan takes a look at the latest fund flow data out today. Mutual fund and ETF investors were net buyers in the week ended Wednesday, upping their purchases to a 10-month high of $18 billion, compared to just $2.9 billion in the previous week.
— PIMCO (@PIMCO) August 22, 2014
BBG: U.S. high-yield bond funds recorded the biggest weekly inflow of 2014 last week
— David Schawel (@DavidSchawel) August 22, 2014
2yr basis getting a well deserved crushing.
— Ed Bradford (@Fullcarry) August 22, 2014