Bond Spreads Signal Recession…Wrong on China and Japan….Junk Bonds Done?…and more!

Best of the Bond Market for September 26th, 2012

The Economist: Corporate bond spreads are signaling recession – Have a look at the article’s chart, it doesn’t look good.

Business Insider: Here’s the only real reason China and Japan own so much US Debt - China and Japan own US debt because they sell a lot of stuff to the US and those dollars get put back into Treasuries. That’s it.

Michael Aneiro: S&P Junk Bond Credit Quality Now Past Cyclical Peak - “We expect to see diminishing credit quality as the cycle continues,” said Diane Vazza, head of S&P’s global fixed income research. “The U.S. speculative-grade bond market has strong technicals such as record-low yields, high issuance, and tight spreads, but we also see rising defaults, increasing downgrades, and companies facing potential macroeconomic headwinds as fundamental credit quality declines.”

Morningstar: Our outlook on the credit markets - Corporate bonds rally as the Federal Reserve’s purchases reduce the supply of other fixed-income securities.

Bond Buyer: Bond Market 2012 Mid Year Review - All the data you could want on the US bond market and more.

Learn Bonds: – Convertible Bond Funds: Equity market returns with less risk? – Investors want to be able to take part in an equity market rally without feeling the pain should the market collapse again.  With the S&P 500 nearing levels not seen since late 2008, there is a growing anxiety that a potential crash is around the corner.

Reuters:Who are muniland’s biggest players? – The retail investor is king in muniland, holding about $1.81 trillion of municipal securities in the second quarter of 2012, according to the Federal Reserve Flow of Funds report. But who are the other big players in the municipal bond market and what are their investment objectives?

NewOak:Distorted agency RMBS and fiscal cliff: NewOak Insights. – Is the fiscal cliff coming? Maybe! But on a brighter note, there is the possibility of special dividend payments as companies look to reward shareholders before possible tax increases in 2013. And is the Residential Mortgage Backed Securities (RMBS) market showing signs of distortion after the Feds announcement to buy RMBS as part of QE3?

FT:Riskiest US bonds enjoy strong demand. – The global hunt for yield is leading investors to the riskiest corners of the US “junk” bond market.  US corporate debt yields have dropped to record lows this year as a result of investors’ search for alternatives to lower yielding, top-tier government bonds. In turn, that has helped reopen the market to even the weakest-rated companies.

Sober Look: Credit markets reversing post-QE3 euphoria - It was clear that the HY marked was frothy going into the Fed meeting, and now asset allocators are starting to come to grips with the fact that it’s gotten even richer. HY CDX and HY ETFs (HYG, JNK) sold off sharply (HY CDX is down 2% in the past 2 days).

eFinancial News: –  US bond investors warm to European banks. – Two European banks raised $1bn each in the US investment-grade bond market this week, in a sign that investors may be beginning to change their stance on buying debt from financial institutions in the eurozone.

ETF Trends:High-Yield Bond ETFs trading at discount after pullback. – ETFs that invest in high-yield corporate bonds are stuck in a six-day losing streak and threatening to break below their 50-day moving averages for the first time since June.

Bond Squawk:High grade corporate bonds trend – Part 2. – The size of the HG USD bond market has now reached a size of $4.7tn, growing steadily since 2009. The recent expansion of the HG bond market largely owes to the issuance from Domestic and Yankee Non-Financial issuers, while the issuance of the HG bonds from Financials has significantly reduced its stake in the market.

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