To get the Best of the Bond Market delivered to your email daily click here.
As 2013 came to a close and pundits started rolling out their 2014 predictions, you would have been hard pressed to find bonds high on anybody’s list. Save for a market mavens, namely Bill Gross, bonds were the ugly Betty of the investment world.
But come 2014, bonds have become the hottest date in town. Chuck Jaffe, writes in MarketWatch:
“Suddenly, bonds are the hot investment, the thing the experts are saying to buy. Fears of a bond bubble—a collapse that was supposed to occur the instant interest rates started to rise—have dissipated, and investors who were being told to give up their bond funds are now being told to circle back for more.”
So What’s Happening?
Kathy Jones, fixed-income strategist at Charles Schwab told Jaffe.
“When the Fed began to reduce its bond purchases, you saw a sell-off in emerging markets, declining commodity prices and a lot of the global economy had been having fun at the party because the Fed had been spiking the punch bowl, but now they were taking the punch bowl away.”
This begs the question, if the experts got it wrong last year, why should we trust them now?
Jaffe says, “While that kind of thinking is fun—you get to blame the experts for being wrong, as they are a lot of the time—it’s also counter-productive.”
“Since 2008, most financial advisers have reported that clients have overweighted bonds; fund-flow statistics showed that inflows into bond funds were oversized as investors looked for protection from the stock market and sought safe havens even as the stock market reversed its course and went on a lengthy run.”
“By the end of 2013, investor sentiment on stocks was getting to nosebleed levels, and the cash was flooding out of bond funds. Investors were late to the party on equities and, apparently, leaving bonds at just the wrong time too.”
Which brings the discussion to what investors should do now that bonds don’t look nearly so scary.
Read the full article to find out.
Todays Other Top Stories
Reuters: – U.S. munis rebound in January, but rally faces tests soon. – U.S. municipal bonds have started the year strong, outperforming most other bonds and equities in a significant rebound from a dismal performance in 2013, when investors fled the sector.
CNBC: – Founder of prominent muni fund jumps to rival. – Bernard B. Beal, a prominent municipal bond underwriter who founded and ran boutique investment bank M.R. Beal starting in 1988, has moved to rival firm Blaylock Robert Van, according to people familiar with the situation.
Reuters: – Illinois $1 bln bond sale to top bill in moderate week for munis. – .S. municipal bond sales are seen totaling $4.5 billion next week, including a $1 billion sale of general obligation bonds by the fiscally troubled state of Illinois.
Reuters: – U.S. cities criticize treatment of munis in bank liquidity plan. – Leaders of U.S. cities and states criticized bank regulators’ proposal to block banks from counting municipal debt toward buffers of easy-to-sell assets they will have to hold in case of a credit crunch.
Reuters: – U.S. municipal bond sales hit lowest level in two years. – Sales of U.S. municipal bonds in January fell to the lowest level in two years, $17.63 billion, as refinancing continued to dry up, according to preliminary Thomson Reuters data released on Friday.
Forbes: – 5 Reasons to still consider munis in 2014. – No doubt, there were some “bumps” on the muni highway in 2013. QE tapering, rising rates and a liquidity crunch stemming from industry outflows dramatically impacted the market. But let me share with you, the five top reasons our MacKay Municipal Managers (MMM) team, led by John Loffredo and Bob DiMella, think munis are an attractive investment for 2014.
WSJ: – Puerto Rico seeking $2 billion debt offering. – Puerto Rico is preparing a debt offering of some $2 billion in coming weeks amid increasing pressure from credit-rating firms and investors for the U.S. territory to shore up its finances, according to people familiar with the plans.
Dallas News: – Investors may have overreacted by abandoning muni bonds. – Many bond investors became spooked by the specter of rising interest rates last year and retreated from the fixed income market like there was no tomorrow.
Digital Journal: – Fixed income investors could benefit from muni bonds in rising rate environment, standish says. – Investments such as municipal bonds that have a yield advantage over Treasuries are likely to be among the fixed income segments that could provide outperformance in 2014 as U.S. Treasury yields start to move higher, according to the municipal bond outlook for 2014 from Standish Mellon Asset Management Company LLC.
Bloomberg: – Illinois pension fix ends bleeding before bond sale: Muni credit. – Illinois’s borrowing costs have fallen to the lowest level in six months as investors join Governor Pat Quinn in wagering that a law bolstering the worst-funded state pension system has “stopped the bleeding.”
Las Vegas Sun: – Unconstrained bond funds: What you should know. – A new kind is on the scene, after many of the formerly steady and reliable workhorse investments lost money last year for the first time in more than a decade. Analysts say conditions will remain tough for bonds, but the industry says these funds can better withstand the challenges. They have more tools at their disposal than traditional bond funds. They can invest in more complex corners of the bond market and employ strategies to make money even when bond prices fall.
Quartz: – U.S. to China: “Happy New Year.” China to US: “Give us our money back.” – When outgoing American ambassador to China Gary Locke wished 700,000 followers on Sina Weibo a happy Chinese New Year (registration required), he received an overwhelming response: Pay back the money you owe us.
Business Recorder: – U.S. bonds on track for biggest gain in 20 months. – US Treasuries prices rose on Friday on month-end buying and lingering concerns about emerging market economies, putting safe-haven bonds on track to notch their strongest gains in 20 months in January.
WSJ: – Treasury bonds rally on weak manufacturing report. – Investors again piled into the safe haven of U.S. Treasury bonds, as a key gauge of manufacturing raised angst over the growth outlook.
MoneyNews: – Gundlach shows why betting against Treasurys a fool’s game. – The market was “entering 2014 struck by a greater consensus entering any year that I can remember, that the dollar has to do well, gold is for losers and bond yields will rise,” Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP, which manages $49 billion, said in a telephone interview from Los Angeles on Jan. 28. “Things were so lopsided in terms of that positioning. That was late in that way of thinking.”
LearnBonds: – Bonds: The best risk-reward when playing Best Buy. – The two safest ways to make money on Best Buy are to use short-term trades or to accept the currently-attractive yield on Best Buy’s 7-year debt. My take on the company is that Best Buy will be around seven years from now, but that there is far too much uncertainty to own a buy-and-hold position in the stock. From a risk-reward perspective, I think it makes a lot of sense to simply buy Best Buy’s senior unsecured debt and hold it to maturity.
AllianceBernstein: – High yield: The perfect storm that wasn’t. – In a year when the US Federal Reserve caused jitters over quantitative easing, the US government endured a shutdown and investors shifted focus to equities, it’s no surprise that pure “duration-sensitive” bonds like US Treasuries had negative returns as interest rates spiked. But high yield emerged relatively unscathed, returning over 7% for the year.
Barron’s: – Junk bonds resilient as stocks sell off, Treasuries gain. – Treasuries are known to zig when stocks zag, but junk bonds have a more complicated relationship with both. Being bonds, they take their cues from underlying Treasury yields, but as they’re issued by low-rated, highly leveraged companies, their fortunes tend to be guided by the same prevailing market trends that impact stocks. In a tug-of-war between bonds and stocks, junk bonds usually come out somewhere in the middle; last year, when the bond market on average lost 2% and the S&P 500 roared to a 32% gain, junk bonds finished 2013 up 7.4%.
About.com: – Should you invest in hedged high yield bond ETFs? – One benefit of the growing number of bond exchange-traded funds (ETFs) is that there are now portfolios covering needs that investors never even knew they had. The downside: some of the strategies can be very difficult to understand. One such category debuted in 2013: hedged high-yield bond ETFs.
Artemis: – U.S. winter storm losses build. What about catastrophe bonds? – Winter storms are a covered peril in a number of outstanding catastrophe bond transactions currently. With the U.S. having suffered from a number of severe spells of winter weather in recent weeks, losses are mounting and some bonds may begin to look exposed.
MainSt: – Finding bonds to buy as interest rates rise. – As interest rates creep slowly upward, bond investors get increasingly nervous – anxious about the impact of rising rates on fixed income portfolio values. But there is a bond segment to consider in such circumstances: It may be time to go tax free.
AllianceBernstein: – Bond History: Rhyming, not repeating. – When the Fed does eventually start raising interest rates, at AllianceBernstein (NYSE: AB) we don’t expect to see bonds experiencing the dire scenarios of 1981 or 1994. Instead, the 2003–2006 period of slow and measured rate normalization seems more likely. But it’s not a perfect match, and we do see some important investment factors to consider.
Investors.com: – Why investors bought bonds and gold ETFs in January. – ETFs tracking the major stock market indexes snapped a four-month winning streak the first month of the year as investors fled stocks and sought safety in bonds and gold.
Zenith Strategies: – Global bond ETFs with little value. – Our last piece on global bonds talked about the larger opportunity set outside of the U.S. That set includes developed and developing markets that range from Sweden to Indonesia.
Mark Meadows: – Bond rally nearing end. – Bonds have rallied at the start of 2014 just as the equity markets have faltered, with the yield on 10-year notes falling nearly 11.8 percent as of Friday’s close. That has helped the ProShares Ultra 7-10 Year Treasury ETF (UST) and the iShares 20+ Year Treasury Bond (TLT) rise more than 6 percent this year. Simultaneously, the S&P 500 has declined nearly 4 percent, presenting a 10 percentage point performance gap between the two.
Reuters: – PIMCO total return fund rises 1.35 percent in January. – The PIMCO Total Return Fund, the world’s largest bond fund run by Bill Gross, rose 1.35 percent in January after posting its worst annual loss since 1994 last year, preliminary data from Morningstar showed on Monday.
— PIMCO (@PIMCO) January 31, 2014
Unusual that we’re seeing Agy MBS widen as UST’s rally – unlike recent periods
— David Schawel (@DavidSchawel) February 3, 2014
For the first time in awhile I cannot make fun of treasury bears, though I will miss asking if we are at 3.5% on the 10 year
— TF Market Advisors (@TFMkts) February 3, 2014
“Bond Squad is my favorite bond investing newsletter. It combines common sense with deep market knowledge.”
– Marc Prosser, Publisher of Learn Bonds
Bond Squad is more than just an investment newsletter! Paying subscribers can call-up bond market veteran trader and portfolio manager, Tom Byrne, for market advice and have him review their portfolio free of charge.
Get a free two-week, no commitment trial of Bond Squad by emailing Tom at firstname.lastname@example.org
Or learn more about Bond Squad’s clearly written, expert analysis, click here