Do You Really Need High-Yield Bonds in a Portfolio and Today’s Other Top Stories

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With the yields on safe bond investments at record lows, investors are being forced to chase yield wherever they can find it—not just in high-yield bonds, but in other risky investments, such as dividend-paying stocks and REITs.

This has forced down yields on high-yield bonds to such an extent that at the end of June 2014, the yield on five-year bonds rated BB—the credit rating just below investment grade—was only 4.3 percent, or about 2.7 percentage points higher than the yield on five-year Treasurys. That puts the yield spread at levels not seen since before the 2008 financial crisis began.

  To see a list of high yielding CDs go here.  

This was followed by cries that the junk bond market was overheating and warnings of bond armageddon when rates do start to rise and investors rush for the exit.

There were signs this was starting to happen last month when investors became nervous about continued tensions in Ukraine and Iraq and the Gaza Strip, dumping junk and heading for the relative safety of Treasuries instead.

Only for analysts to say the sell-off was overdone and junk bonds now offer fair value. Something a number of larger funds were keen to take advantage of as they began snapping up the debt.

All of this volatility might put individual investors off owning high-yield bonds in the future, but this might not be a bad thing. Larry Swedroe and Kevin Grogan argue that high-yield bonds offer little to a portfolio and investors would do better to invest in other asset classes that provide greater returns instead.

 

Todays Other Top Stories

Learn Bonds

LearnBonds: – Making sense of market volatility. – There is nothing on which fixed income traders can trade. Volumes are pitiful, there is nothing especially attractive in the fixed income markets and we appear to be locked into a trend growth economy in the United States. Japan remains stuck in a decades-long economic malaise and the Eurozone could join Japan in the land of misfit economies. Face it folks, the bond market seems priced to perfection. Until we have a clearer picture on Fed policy, economic growth and wage growth, traders could continue to manufacture volatility.

 

Municipal Bonds

AAM: – The road to navigating the changing municipal bond market. – Municipal bond participants are following closely the state of affairs in Puerto Rico and Detroit. In each case the outcome and changes in the municipal market landscape will likely be driven as much by politics as pure economics.

Income Investing: – BlackRock touts unconstrained strategy for muni investing. – With the Fed poised to start hiking short-term rates in the next year or so, BlackRock sees interest rates becoming more volatile and says municipal bond investors should be looking to the same unconstrained-style fund strategies that have been gobbling up market share across the broader bond market.

Bloomberg: – California $4 billion school-bond push in jeopardy: Muni Credit. – California lawmakers are pressing to add a $4.3 billion school-bond measure to a November ballot already crowded with a $7.1 billion proposal to sell debt to ease a crippling drought.

Benzinga: – Is it time to sell out of longer term municipal bonds? – Longer term municipal bonds with maturities of around 15 years to 25 years looked very attractive at the beginning of the year as they yielded the same or more than comparable taxable bonds. That’s rare.

Elliott Wave: – Municipal Bonds: The bait in the trap. – Municipal bonds offer tax-free income and are perceived as relatively safe. But municipal bond investors should remember that the finances of many states and cities remain precarious.

 

Bond Market

Bloomberg: – Missing MBS in bond indexes distort funds, Citigroup says. – After years of using purchases of U.S. government-backed mortgage securities as a stimulus tool, the Federal Reserve owns almost a third of the debt outstanding.

 

Treasury Bonds

WSJ: – U.S. Government bonds boosted by CPI data in U.S., U.K. – Treasury bonds strengthened Tuesday as tame inflation reports from the U.S. and the U.K. bolstered investors’ expectations that major central banks will be patient in raising interest rates.

 

Investment Grade

Donald van Deventer: – Bond market battle: Berkshire Hathaway Vs. Kinder Morgan Energy Partners. – Two financial market titans head the list of “best value” bond trades with maturities of 20 years or more as of August 15, 2014. We last ranked the best value fixed rate corporate bond issues on July 25, 2014 for maturities of 20 years or more.

BlackRock: – Four ways to increase your corporate bond exposure. – Looking at the corporate bond market over the past few years, we see that there has been a growing demand for both investment grade and high yield corporate bonds. This rise in demand has been met by a substantial increase in the size of the corporate bond market.

 

High Yield Bonds

Bloomberg: – PIMCO scoops up quality junk cast off in high-yield fund exodus. – Pacific Investment Management Co. (PCARX) has been snapping up some of the higher-rated junk bonds dumped by speculative-grade debt managers amid the recent exodus from funds.

Wyatt Investment Research: – The high yield safety net: MLPs. – Until a few years ago, many income investors stayed away from things that sounded exotic like, “Master Limited Partnerships”. The truth is these are nothing more than regular businesses structured in a different manner that allowed regular investors to buy pieces of them.

Bloomberg: – Junk bonds return to favor as risk gauge shows confidence. – The junk-bond market, which was rattled last month by its biggest slump in more than a year, is poised to recover its losses as demand resurfaces for riskier assets.

Financial Post: – Why fears of a high-yield debt collapse were overdone. – If there is an impending crash in the high-yield corporate market, you wouldn’t think it by looking at all the companies seeking to raise cash with high-yield debt.

Indexology: – A renewed interest in high yield bonds. – High Yield Bond Market – Outlook has changed to the positive, away from the recent stories of overvaluation and fund withdrawals.

Bloomberg: – Junk bonds return to favor as risk gauge shows confidence. – The junk-bond market, which was rattled last month by its biggest slump in more than a year, is poised to recover its losses as demand resurfaces for riskier assets.

Bloomberg: – Open a junk-bond ETF’s Kimono to see a lot of expensive shorts. – Hedge funds dislike junk bonds so much that they’re willing to pay 48 times more to short the debt using exchange-traded funds than at the end of last year.

BlackRock: – Is the high yield sell off buying opportunity? – Following the recent junk bond sell-off caused by geopolitical risk in Russia and the Ukraine, uncertainty in the Gaza Strip, as well as some inflationary pressures and what the Fed is going to do. BlackRock asks whether high-yield now offers a buying opportunity.

 

Emerging Markets

Latinfinance: – LatAm bonds set for September rebound. – After a lull in August, Latin American borrowers are expected to return to tapping international debt markets in the coming weeks.

Professional Planner: – For investors returning to emerging markets, here are seven things you should think about. – Global asset manager AllianceBernstein said today that there were seven points investors should consider if they wish to join the move back into emerging markets.

Businessweek: – Ukraine to Iraq fail to dent record emerging bond sales. – Political crises from Ukraine to Iraq have failed to stop emerging-market issuers from selling bonds at an unprecedented pace this year as investors shift their focus to Asia and Latin America.

 

Investment Strategy

Financial Post: – Don’t fall into the trap of ignoring investment risks to chase returns. – It is shaping up to be another good year in the equity markets as investors have ignored calls for a correction and continue to buy the dips. Put another way, it is clearly still what pundits term a “risk-on” market.

 

Bond Funds

Zacks: – New active multi-asset ETF to ride out current turmoil. – Actively managed ETFs are gaining immense popularity in recent months courtesy of increasing demand and the potential for more favorable regulations. While these represent just a small slice of the broad ETF world, they aim to beat the benchmark index or the passively managed counterparts even if the odds are against them.

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