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Today’s disappointing jobs report was bad news for the U.S. dollar but provided a welcome boost to the bond market.
This mornings data released by the Bureau of Labor Statistics showed that the nation added just 113,000 jobs in January, vs. 75,000 in December. Well below analysts expectations of 185,000.
The bond market thrives on bad news like this. When the economy is slack, there’s less demand for borrowing, and interest rates fall. Lower rates means that the prices of bonds with higher yields rise.
The 10-year Treasury note regarded as a bellwether for the U.S. economy, started the year trading at 3.03%, and now yields just 2.66%.
Many analysts have tried to blame the downbeat data on this months extreme weather. But John Lonski, Team Managing Director for the Economics Group at Moody’s Analytics, says this is nonsense.
“The average job loss due to bad weather in January in the household survey is 419,000, but what they claim we lost was 40% less this January,” said Lonski, “the construction sector gained jobs in January, something that’s unusual in a period of bad weather.”
And, he says, “weak wage growth means that the economy can’t grow faster. “And that means it’s less likely the economy is strong enough to shoulder a 3% Treasury bond yield or higher,” he says.”
So it looks like bonds might hold on to this months gains for a little while longer. So much for the “Great Rotation”.
Todays Other Top Stories
Credit Bubble: – Relative opportunity in muni bonds. – The investor base for munis is retail investors in high tax brackets, but many of them sold out last year because of Detroit and Puerto Rico headlines, and because the conventional wisdom is that interest rates can only go up. So yields went up and the closed end funds are trading at discounts to NAV.
Reuters: – Redemptions force U.S. mutual funds to unload Puerto Rico debt. – U.S. mutual funds with heavy exposure to Puerto Rico bonds have sold off some of the cash-strapped island’s debt to meet investor redemption demands, taking heavy losses after a year-long slide in prices.
ETF Daily News: – What you need to know now that Puerto Rico is ‘junk’. – Conversations I’ve had with investors at conferences and elsewhere tell me the same thing. They want yield, and they think munis are a safe place to get some, especially with the tax exemption “kicker.” That’s true historically. Munis very closely tracked Treasuries, with very little “risk premium” built in. But are munis as safe as bonds issued by Uncle Sam anymore?
FT: – Fed rule will hit spending on roads and schools, say U.S. cities. – U.S. cities and states are warning regulators that they will face budget crunches to pay for schools, roads and sewage systems if a proposed liquidity rule for banks is finalised.
Barron’s: – That didn’t last long: Muni funds revert to outflows. – The brief winning streak for municipal bond mutual funds and ETFs is over, as said funds just reported a $227 million net outflow in the past week, per Lipper data. Those funds had mustered three straight weeks of modest net inflows in January, which put a halt to the 33 straight weeks of net outflows for such funds dating back to last May.
BondBuyer: – Puerto Rico debt demand may survive downgrade. – Puerto Rico’s planned debt issue may still find demand among mutual funds after the commonwealth was cut to junk grade by Standard & Poor’s, even though some fund managers are restricted from buying speculative paper.
Morningstar: – Perspective on Puerto Rico’s debt downgrade. – The anticipated downgrade had already been pretty well priced into the markets. Also, the progress Puerto Rico has made has gotten lost beneath all the headlines.
Bloomberg: – Puerto Rico faces $940 million bill after bonds are cut to junk. – Puerto Rico is trying to refinance debt or negotiate with creditors to avoid making a $940 million payment, almost 10 percent of its budget, after the U.S. commonwealth was cut to junk by Standard & Poor’s this week.
Bloomberg: – Detroit plan revives investor scrutiny of Michigan. – Detroit’s plan to reduce its $18 billion of liabilities may derail the biggest wave of Michigan debt issuance since 2009 and elevate borrowing costs as investors renew focus on the state’s approach to bondholders.
LearnBonds: – Investing in Master Limited Partnerships. – Master Limited Partnerships, also referred to as MLPs, are potentially an excellent option for those investors who are focused on income. Learn more about them here.
ETF Database: – First floating rate Treasury ETFs debut. – This year, for the first time in its history, the U.S. Treasury rolled out floating rate notes (FRNs), marking the first new class of issuance by the Treasury since it issued TIPS in 1997. On January 29, 2014, the U.S. Treasury completed its first floating rate auction, and now two issuers have debuted the first ever ETFs to offer exposure to the new notes.
WSJ: – Debt investors again head to safer shores. – Bond investors have been buying up ultrasafe debt and pulling back from higher-yielding bets in recent weeks, suggesting waning confidence that rates will rise and the Federal Reserve will continue to withdraw its bond-buying stimulus.
Economist: – A new world for bonds. – The idea of alternative weightings for indices has been around for a while in the equity market, and is known in the jargon as “smart beta”. It makes sense for such ideas to be extended to the bond market.
WSJ: – Private-equity firms tap fresh vein of cash. – Private-equity firms have found another way to extract money from their companies. Strong investor appetite for high-yielding bonds and initial public offerings has enabled private-equity-owned companies to issue a new type of debt that can be repaid early, and at a small premium, if the borrower goes public.
MarketRealist: – Why credit risk is an essential value driver of high yield bonds. – Bonds are highly sensitive to credit risk—other than U.S. Treasury securities, which are more prone to interest risk. Credit risk, also known as “default risk,” is the probability that an issuer may default on interest and principal payments. Credit risk hugely varies based on the issuer’s operational and financial stability.
Reuters: – Amid turmoil, U.S. high-yield market soldiers on. – Equities may have taken a battering from the emerging markets sell-off, but the US high-yield market is taking it in stride, with risky paper being scooped up with little investor pushback.
Forbes: – High yield bond funds see another large cash outflow. – Retail-cash flows to high-yield funds were deeply in the red again this week, with a $972 million withdrawal in the week ended Feb. 5, after a $909 million outflow in the prior week, according to Lipper. The influence of ETFs continued to dominate, at 62% of the outflow this week, though that was down from 99% last week.
Reuters: – Volcker Rule scares CLOs out of high-yield FRN market. – The growth of the high-yield FRN market could be in jeopardy as new regulatory rules introduced in December begin to impact CLO demand for the format.
WSJ: – Investors bolt from stock funds into bonds. – Investors swapped out of U.S. equity funds and into bonds at the fastest clip on record last week, according to Lipper Inc., as they grasped for safety while the stock market swooned.
Business Insider: – Here’s why it’s a terrible idea to buy individual bonds over bonds funds. – Many investors think they will be protected in the event of interest-rate rises if they buy individual bonds (and hold them to maturity) over bond funds. But Sam Lee, a strategist and editor of Morningstar ETF Investor, thinks this is “absolutely false”.
Bloomberg: – Investors shift record amounts from U.S. stocks to bonds. – Investors shifted record amounts out of U.S. stock funds and into bonds, while withdrawing money from emerging-market equities for a 15th straight week, according to Citigroup Inc.
Kapitall Wire: – Should you be buying bond ETFs instead of stocks right now? – Investors are moving their money from stocks to bonds. Should you? We checked out 9 of the top bond ETFs.
Gross: Low priced leverage makes all assets go up. PIMCO is enjoying the ride but mindful of exits.
— PIMCO (@PIMCO) February 7, 2014
BREAKING: Puerto Rico GO and Related Bonds Downgraded to Ba2 by Moody’s. COFINA Bonds Also Downgraded. Affects $55 Billion.
— Brian Chappatta (@BChappatta) February 7, 2014
GaveKal: This is only the third time since 1971 that the US current account deficit has improved w/out an accompanying recession
— David Schawel (@DavidSchawel) February 7, 2014
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