Bond Funds Hiding Risky Bets…Gross Says Dump BND and AGG for BOND..and more!

Best of the Bond Market for September 21st, 2012

WSJ:Bond funds leap beyond their benchmarks. – In a world of shrinking bond yields, many mutual funds have found a way to make themselves look better. Their secret: Invest in riskier bonds but continue to measure their performance against benchmarks composed of safer investments.

Index Universe: – Bill Gross: Dump AGG & BND; buy BOND. – Bill Gross, the famed money manager behind the $274 billion PIMCO Total Return Fund, did some hard selling today, saying the time is ripe for investors to dump popular bond ETFs and simply go for the best; namely, the $2.7 billion Pimco Total Return ETF (NYSEArca: BOND) he himself manages.

Reuters:Municipal bond market contracts slightly to $3.726 trln. – The U.S. municipal bond market shrank slightly in the second quarter of 2012, to $3.726 trillion from $3.732 trillion the previous quarter, according to Federal Reserve estimates released on Thursday.

Bloomberg:Bond sales in US decline 11% from fastest pace in 6 months. – Sales of corporate bonds in the U.S. decreased 11 percent this week, falling from the fastest pace in six months, following announcements of central bank efforts to curb borrowing costs and stimulate growth.

California Watch:Regulators urged to crack down on donations to bond measures. – Critics of political donations to school bond campaigns from companies that profit from the bonds are urging federal regulators to take bolder steps against what they call a “pay to play” practice.

Learn Bonds:Bill Gross is bullish on municipal bonds bearish on treasuries. – PIMCO’s flagship fund cut its treasury holdings by ⅓ in August whilst their municipal holdings are growing.

Bond Squawk:Fiscal Cliff would be good news for treasuries but lead to volatility for stocks and high yield corporate bonds. – The Wall Street Journal reported that Moody’s Analytics puts the probability of a recession borne from the Fiscal Cliff at only 15%. The tax increases and spending cuts as scheduled to come into effect in 2013 would have a huge negative effect on the economy. In turn, this could have a major effect on the capital markets and needs to be taken into consideration in an investor’s strategy.

BusinessWeek:A shortage of bonds to back derivatives bets. – Starting next year, new rules will force banks, hedge funds, and other traders to back up more of their bets in the $648 trillion derivatives market by posting collateral. While the rules are designed to prevent another financial meltdown, a shortage of Treasury bonds and other top-rated debt to use as collateral may undermine the effort to make the system safer.

MarketWatch:Detroit bond yields are 4 to 6 times those of San Jose. – Just as technology rakes in more bucks than the ailing U.S. auto industry, bond investors are more interested in buying safer debt from Silicon Valley than from Motor City, despite much higher yields.

Web of Debt:Why QE3 won’t jump start the economy. – The economy could use a good dose of “aggregate demand”— new spending money in the pockets of consumers—but QE3 won’t do it.  Neither will it trigger the dreaded hyperinflation.  In fact, it won’t do much at all. There are better alternatives.

FT Adviser:Barclays strategists cautious on bonds. – Barclays Wealth strategists have said they are remaining underweight bonds even in spite of the US Federal Reserve’s announcement of another massive monetary stimulus package.

Bond Buyer: – House Passes Muni Advisor Bill, Drawing Mixed Views - The House of Representatives passed a bill late Wednesday that would narrow the definition of municipal advisor and exempt a number of market participants from being subject to MA registration and other rules.

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