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You’ve heard of the “new normal” from Bill Gross, now we have the “no normal” from Jeff Gundlach. In a recent interview with Bloomberg’s Tom Keene, the DoubleLine Capital CEO explained that the bond market hasn’t entered a New Normal period, as Bill Gross and Mohamed El-Erian once described, but a “no normal” period where we can’t really assess what the driving paradigm is going to be.
Gundlach doesn’t think that bond yields will go up anytime soon. “Baby boomers are now retiring and approaching retirement at a rapid pace, and they are looking for conservative investments with little downside risk.” Gundlach said. “This demographic demand for Treasury bonds will put pressure on yields even when other investors are starting to stay away.”
To see a list of high yielding CDs go here.
The bigger question is what will happen in six to ten years when financing needs push rates up, but Gundlach doesn’t think anyone can say with confidence what sorts of policies will be put into place to deal with the situation.
One reaction to low yields has been increased enthusiasm for high yield corporate debt, but Gundlach doesn’t think there is a strong value argument for high yield. First, he compares high yield to 30-year Treasury bonds (instead of 5 or 7 years) because it has a similar risk profile. At the beginning of 2014, 30-year Treasury bonds had a 4% yield compared to 4.4% for BB corporate bonds.
But corporate bonds face a number of risks that Treasury bonds don’t. If rates fall the bonds can get called in and refinanced, if yields rise you can lose out on interest rates, and if defaults pick up then the 4.4% won’t actually be achieved regardless.
The result is that Gundlach sees high yield corporate bonds as “the most overvalued in history,” relative to Treasuries.
You can view the full interview here.
Todays Other Top Stories
Bond Buyer: – High-yield migration – Muni managers seek out attractive returns. – When opportunity knocks in the municipal high-yield sector, municipal fund managers answer.
Reuters: – Detroit leads 2013 U.S. bond defaults: Moody’s. – Detroit accounted for three of the seven defaults last year on municipal bonds rated by Moody’s Investors Service, the credit rating agency said on Wednesday.
Moody’s: – Moody’s: Municipal bond defaults remain low in number, but new trends are emerging. – Municipal bond defaults have increased in number since the financial crisis, but remain extremely infrequent, says Moody’s Investors Service in the report, “US Municipal Bond Defaults and Recoveries, 1970 — 2013.” With seven Moody’s rated defaults in 2013, after five in 2012, there has been an average of 5 defaults per year over the 2008-13 period.
Bloomberg: – Chicago’s biggest bondholders torn on city’s future: Muni Credit. – The biggest holders of Chicago general-obligation bonds are diverging on the city’s outlook as it stares down $590 million in extra pension payments. State lawmakers invoke Detroit as the consequence of inaction.
Cate Long: – Knowing the best way to trade municipal bonds. – For retail investors, it has always been a little murky where their municipal bond trades are executed. But now the Municipal Securities Rulemaking Board has announced that it will seek approval for a new best execution rule that governs how broker-dealers handle retail orders for municipal bond trades.
LearnBonds: – Will bond prices rise for the next 30 years? – While many market watchers called an end to the 30 year bull run in bonds following the Fed’s infamous “taper call” nearly a year ago, interest rates have fallen rather substantially, surprisingly to many, since the beginning of the year. Indeed, despite the diminishing bond buying activity from Constitution Avenue, the rate on the 10-year Treasury has been edging back towards 2.5% after bumping up against 3% several months ago.
Reuters: – Long bond price rises as traders await Yellen. – The 30-year bond and other long-maturity U.S. Treasuries rose on Tuesday in thin, meandering trade ahead of potentially market-moving congressional testimony by Federal Reserve Chair Janet Yellen.
ETF Daily News: – Corporate bond ETF for investors to consider. – Thanks to rock-bottom interest rate of government backed bonds which offer safe haven opportunities, the U.S. corporate bond market has been on a rocky path as these normally yield higher than their Fed cousins. Also, a slow-but-steady U.S. market recovery and strengthening of corporate America have helped the related high yield bond market to climb.
Bloomberg: – Celgene leads U.S. bond offerings as yields fall to 11-month low. – Companies returned to the U.S. bond market today following almost a week of below-average issuance as borrowing costs reached an 11-month low amid a pullback in U.S. economic growth.
High Yield Bonds
Bloomberg: – Junk-bond traders pile onto hedges amid Fed after rally. – With the Federal Reserve getting ready to boost interest rates, investors are adding hedges to junk bonds as they grow ever more expensive versus stocks.
Washington Post: – Junk bonds pricier than stocks mean high-yield getting expensive. – Get ready to pay more to earn less relative to stocks if you’re looking to jump into the high-yield debt market.
Reuters: – PIMCO’s bad bets on emerging markets add to firm’s troubles. – Betting on emerging markets has led to losses for many over the past year – but among big investors few got the timing of their wagers as wrong as Pacific Investment Management Co, the giant bond firm that has recently been roiled by a rupture at the top.
Businessweek: – Gundlach bullish on emerging markets signals debt back in vogue. – Remember when bond investors were fleeing emerging markets, convinced the debt was doomed in an era of less Federal Reserve stimulus?
Tucker Leppa: – Avoid these 2 high-yield mortgage REITs. – In each of the past five quarters, WMC has seen a reduction in book value. The offering of common stock was priced ~$14.75 net expenses.
Income Investing: – Shift from junk bonds into high-yield munis, loans. – Junk-bond valuations are getting a little out of hand, so yield-hungry investors should shift some money out of junk bonds into bank loans and high-yield muni bonds. That’s the verdict of George Rusnak, national director of fixed income for Wells Fargo Private Bank, in his latest weekly outlook piece.
YChart: – Stocks for income / value in bond-loving market. – Sometimes sexy is overrated. We’re nearly a third of the way through the year and it’s those old wallflowers, bonds, particularly municipal bonds, which are outperforming.
WSJ: – Stan Richelson, on sticking with long-term bonds. – If a client is a retired and needs an income stream of $50,000 to $200,000, advisers should view long-term, high-quality bonds as still the best way to go. There’s a big lie that keeps being repeated. Interest rates are so low that you can’t invest in bonds.
Cliff Smith: – Tactical unified bond strategy with high sharpe ratio. – A tactical Unified Bond Strategy (UBS) has been developed that has the potential of providing good annual growth (>14%) with a maximum drawdown of 4%.
Investment News: – How much should you allocate to nontraditional bonds? – Just because the mutual fund industry has been flooding the market with nontraditional bond funds is no reason to jump blindly into the space.
ETF.com: – Ferri: 5 ways to improve your portfolio. – Experienced investors know what makes a portfolio work. The keys to success are contained in a few timeless concepts that, if followed religiously, will lead to the best outcome. These five “reminders” will help you focus on the big picture and avoid the noise.
Moss Adams: – Balancing your bond investments: Tax-effective strategies for fixed income portfolios. – As we’ve seen, investors can manage the risks of bond investing by incorporating high-quality securities laddered over several maturities. But there’s another important factor to consider when investing in bonds: taxes.
Focus on Funds: – ETFs See $1.5B in inflows last week; Shorting junk bonds, biotech just got pricier. – In its weekly ETF flows report, Credit Suisse’s Victor Lin noted that these products attracted $1.5 billion in inflows through the week ended May 2, “driven mostly by fixed income with the Fed announcing rates would remain close to 0 even after bond purchases end.”
WSJ: – Allianz backs PIMCO, Gross amid struggles. – PIMCO and co-founder Bill Gross got a vote of confidence from owner Allianz SE as the fund company struggles with subpar investment performance and investor defections.
ETF.com: – Falling yields boost long-dated Treasury ETF. – So much for the higher U.S. Treasury yields financial markets were expecting as the Federal Reserve tapers its monthly bond purchases.
$36 million in legal fees in Detroit bankruptcy so far, and the city will probably end up back in Ch 9 because they aren’t fixing anything.
— munilass (@munilass) May 7, 2014
I like long munis and $DBL as “hedges”. DBL benefits if Fed hikes slower than expected & if duration holds up
— David Schawel (@DavidSchawel) May 7, 2014
Amazing how resilient the 1s 2s curve is to flattening.
— Ed Bradford (@Fullcarry) May 7, 2014