Best of the Bond Market Top Story: Unbelievable Chart Puts Fed Money Supply Increase into Prospective

Best of the Bond Market for March 29th, 2012

Top Story

Tweet and chart by @ritholtz

Our Take: I knew the fed has increased the money supply dramatically since the financial crisis, however this chart put together by Barry Ritholtz of The Big Picture shows just how large the increase has been.  What I would love to see is this chart compared to the money that has been “taken out” of the economy through consumer de-leveraging.


Other Top Stories

Article by The Wall Street Journal

Fed Chief Bernanke Defends Bond Buys – Our Take: Beranke spoke again today at George Washington University as part of his college lecture series.  You can see the video here.  He defended the dramatic increase in the money supply shown in the chart above and outlined the Fed’s options to take that money back out of the economy should inflation pick up: “These include selling assets and raising the interest rate it pays on the reserves that banks hold at the Fed, which would encourage banks to keep money parked with the Fed rather than lending it out to consumers and businesses”.

Tweet and Article by @indexuniverse 

Why Fixed Income ETFs May Fall Short Our Take: The unique characteristics of the bond market make it especially difficult to create ETFs to mimick the underlying indexes they are supposed to track.  If you are investing in or trading Bond ETFs this is a must read but the short version is:

  1. It is not always cost affective to buy all the bonds in an index so managers will buy a selection doing their best to represent all the bonds in the index without buying them all.
  2. Because the duration of the index remains the same but the underlying bonds get shorter in duration the longer you hold them they ETFs have to replace the bonds in the portfolio much more frequently than is the case in equity ETFs.
  3. Because many bonds are not very liquid transaction costs can be significantly higher than equity ETFs as well.

Tweet by @DavidSchawel

Bonds keeping their strength despite equity comeback…10yr real rates 2bps lower on the day Our Take: Further proof that everyone calling for the trend in earlier march of further bond weakness to continue were pre mature.

Video by @morningstarinc

Nuveens John Miller Says Muni Credit Risk Is Overblown – Our Take: Good video which not only sums up how much lower the risk is with municipal bonds than other types of bonds but also where there are currently some good opportunities for yield in the market.  It all basically comes down to high yield muni bonds for the following reasons:

Default rates are still only around 1% for high yield municipal bonds because they are still generally issued to fund services that are essential to a community.

  • This compares to a total default rate for all corporate bonds (not just high yield corporates which would be much higher) of 2% in a good year and 8% in a bad year. Corporate rate is 2% in a good year in 8 % because there is an essential service benefiting the community.
  • While high yield municipal bond default rates have been falling since 08 and 09, credit spreads (the difference in yield between investment grade and high yield munis) are still above their historical average by a good amount.
Have an interesting tip or piece on the bond market that should be included in the best of the bond market? Email or find us on twitter@learnbonds.

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