Prelude to a Bond Massacre – History Lesson…Buffett Returns to Muni Insurance…EM Corporates Commit Original Sin…and more!

Motley Fool: – The bond market massacre began on this day. – 19 years ago today, on Feb. 4, 1994, the Federal Reserve unexpectedly raised the federal funds rate by 25 basis points — the first increase in five years (Note: One basis point is equal to 100th of a percentage point.) That month, long-term Treasury bonds — those with the greatest sensitivity to rising rates — lost 4.5%.

Bloomberg: – Buffett’s Berkshire returns to once-shunned muni market. – Warren Buffett’s municipal-bond insurer, which has shunned the market since 2009, returns this week backing part of a debt deal for a development around one of his company’s Nebraska Furniture Marts planned near Dallas.

Learn Bonds: – The 10 year treasury: Where to next? – So far 2013 has been an exciting year for the bond market.  Junk bond yields have dropped below 6% for the first time ever, while at the same time the yield on the 10 year treasury has moved significantly higher.  With this in mind, I thought it would be constructive to have a look back at what we can learn from this, and what insight current price levels may give us into future price action.

FT: – EM companies commit ‘original sin’ on debt. – A roaring trade in emerging market bonds has triggered fears an EM debt bubble is inflating. Never before has the developing world enjoyed such low borrowing costs, at least in US dollars. The risk is that some emerging economies – and their companies – may be borrowing too much in foreign currencies.

Steven Bavaria: – Best bond investment strategy: ‘just say no!’ – Automatically allocating part of your portfolio to bonds made sense thirty years ago, when interest rates were at record highs and continued to make sense for years thereafter as rates slowly dropped but still offered reasonable yields. But with interest rates at record lows, all that Treasury bonds and investment grade corporate bonds do for your portfolio is to lock in a substandard yield for years to come. – The bond bubble: Fact or fiction? – During the final months of 2012, the talk of a “bubble” in the bond market grew to roar – and so far this year, nothing has changed. Following a 31-year bull market in Treasuries and several years of strong out-performance for corporate, high yield, and emerging market bonds, the number of commentators proclaiming that bonds are a bubble set to burst has increased exponentially. This may leave investors wondering what a bubble is, what the basis is for this claim, and what a bursting bubble may mean for their portfolios. We seek to answer each of these questions in turn.

Pensions & Investments: – Straitjacket investing: Passive has its limitations. – Over the past four years investors withdrew $310 billion from actively managed equity mutual funds and ETFs. This not perhaps surprising considering the performance of these funds but is passive investing really the way to go.

Charles Margolis: – Berkshire’s railroad of bonds. – Berkshire’s newest bonds yield more than lower rated Burlington Northern Railroad Co. mortgage bonds, issued in 1990. Though, as you will see Burlington’s highest yield bonds, with large premiums, still outpace Berkshire.

FT Alphaville: – The great rotation: Not so great and not really even a rotation. – The ‘great rotation’ from bonds into equities: a few weeks ago it was looking like it might be seriously on. Even Albert Edwards sort of kind of said equities were cheap. And Ray Dalio said it is happening, too. But there are a bunch of reasons why it doesn’t seem to be quite such a sure thing, at least for now.

Anthony Valeri: – January 2013 bond sector total returns. – How did the bond sector perform in January? You’ll be lucky if you saw any return at all.

Forbes: – The bubble in bonds. – Neil Irwin argues that there is no bubble in US Government Bonds. I, on the hand, routinely say that US Treasuries are in a bubble. Part of the problem is that we are kinda of talking about different things, though that’s a bit dicey because we are definitely looking at the same phenomena. We see different things we when look at those phenomena.

Business Insider: – Rising Rates Could Create a disorderly bond market sell-off unlike anything we’ve ever seen. – The Wall Street consensus is that Treasury yields are headed higher in 2013. That’s big news because it could mark the end of a three-decade bull market in bonds.

Bloomberg: – High-yield in California gives government’s bonanza. – California’s rebounding finances are drawing investors to the riskiest debt of the world’s ninth- largest economy, buoying prospects for a revival in bond sales by its blight-fighting organizations.

Barron’s: – Leveraged loan funds draw record $927M weekly inflow. – Leveraged loans—bank loans made to speculative-grade companies and sold to investors as senior floating-rate instruments—were gaining ground on high-yield bonds before the financial crisis but the market pretty much disappeared in the immediate aftermath. That market has been resurgent over the past four or five months, and income-starved investors have been piling into loans, which offer floating interest rates as a hedge against possible inflation and are senior to junk bonds so they get paid back first in the event of a bankruptcy.

FT: – Investors face end of big US bond returns. – While the Fed’s buying spree is continuing at the rate of $85bn per month, at least for now, the likelihood of further declines in interest rates has diminished; meaning capital gains could be a thing of the past. The meagre interest income, called the coupon, might be all you get from a bond portfolio this year – and that is if you are lucky.

Barron’s: – Junk bond decline: Should you be afraid? – The sudden downturn in high-yield corporate bonds should give investors a wake-up call. While it is not unusual for any market to pull back after a few months of strong gains, this market’s departure from other so-called “risk assets” could be an early warning that the recent strong run in the stock market is in jeopardy.

Economist: – The impact of low interest rates. – Interest rates are very low around in developed world; near-zero in nominal terms and negative in real terms. This is part of a deliberate policy by central banks to discourage saving and encourage borrowing. How might low real rates boost the equity market?

Business Insider: – A mad rush could be coming in the corporate credit markets. – Credit markets have undergone a substantial metamorphosis in recent years as a world of ultra-low interest rates has forced more and more investors searching for yield opportunities into investment grade and high yield corporate debt. So what happens next?

ETF Trends: – High-yield bond ETFs: Rush for the exits? – The cash outflows in the largest junk bond ETFs such as iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) have analysts wondering whether the pullback is a healthy correction after a strong rally, or a sign of something more serious in credit markets.

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