Corporate Debt Free for All…Junk ETF Explosion…1.73% 10 Year Line in the Sand…and more!

Best of the Bond Market for August 13th, 2012

WSJ: Interest rates are so low that even companies that don’t need money are raising it – skeptics say the ravenous demand for corporate bonds has pushed yields on the securities down too far to compensate investors for their risk.

Investment News: 42% of high yield bond ETF’s assets were invested in the last 6 months as demand soars.  – The bulk of the ETF inflows have gone into the two biggest high-yield ETFs, iShares’ $15 billion iBoxx High Yield Corporate Bond ETF (HYG) and State Street Corp.’s $10.9 billion SPDR Barclays Capital High Yield Bond ETF (JNK). Both have yields over 7%.

Bond Squawk: 1.73% is the line in the sand for the 10 Year Treasury – For Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain, who continue to favor the broader bull trend, the recent backup was revealing as buyers emerged with last Thursday spike in yields. As a result, the line has been drawn in the sand at the 1.73% level as support.

The Big Picture:A huge swath of the federal debt is about to go away, courtesy of political dysfunction and committee failure.” – If you really believe the deficit is a problem for investors (and the Bond Markets sure don’t) then you need to find another boogieman.

Learn Bonds: With his latest bond play, Warren Buffett wins either way – Buffett’s real intention in bidding for Rescap is to drive the price up for Nationstar. The more the auction brings in, the higher the payout for ResCap’s bondholders (of which Berkshire is one of the biggest).

ETF Trends: While most fixed income ETFs are seeing massive inflows SHY sees massive outflows.  – The $9 billion ETF has experienced $904 million of outflows the past month, according to  The fund has a 30-day SEC yield of 0.12%, according to manager BlackRock, which is more than the 0.15% expense ratio.

WSJ: How to know when your municipal bond is headed for trouble – Unemployment rates, changes in property values, decreases in rainy-day funds, large debt loads and falling population can all serve as early warning signs that a municipality is in trouble.

Hussman Funds: The only reason stocks and bonds are not more closely correlated is that bonds have a shorter duration.  10-year bonds have an effective duration of only about 7-8 years, depending on the coupon, which means that your ending wealth is nearly completely determined within that horizon. In contrast, stocks are very long-term assets, with an effective “duration” roughly equal to the price/dividend ratio*, which means that changes in valuation dramatically affect the terminal value of your investment even for horizons out to 30-40 years, and sometimes longer when valuations are rich and yields are low.

Bond Buyer: High Yield Muni Bond funds are showing strong returns and even stronger inflows – In the second quarter, muni high-yield funds represented only about 12% of all muni fund assets, but one-third of all flows into the municipal bond fund space.

Index Universe: Why junk bond yields are likely to fall even further – The negative macroeconomic environment, combined with the Federal Reserve’s actions, may indicate that yields on junk bonds have nowhere to go but down.

Businessweek: Long term investment grade bond issuance has already surpassed 2010 and 2011 levels for the year. Issuance of investment-grade bonds maturing in 30 years or more totals $83.6 billion since year-end.

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