Gundlach on the Fed’s Unintended Consequences…Bond Investors Jumping Ship?…US Downgrade Alert…and more!

Best of the Bond Market for October 18th, 2012

Marketwatch: Jeff Gundlach says Fed’s unintended consequences could weaken growth for decades to come - The Fed’s policies are having the unintended consequence of making it harder for young people to find jobs, because older people are working longer since their savings are no longer enough to live off of.

Money Control: – Investors abandoned fixed income and headed for equities during Q3, according to Larry Fink of BlackRock. – After hiding out in fixed income, investors began to put money back into riskier assets like equities during the third quarter, BlackRock CEO Larry Fink told CNBC’s “Closing Bell” on Wednesday.

Bloomberg: US Downgrade alert: The US will get downgraded; it’s just a question of when says PIMCO. – The sovereign credit rating of the U.S. will be cut as “fiscal theater” plays out in the world’s biggest economy, according to PIMCO, which runs the world’s largest bond fund.

Tim Duy: Did the Fed pull the trigger too soon?  - The death of the consumer continues to be more myth than reality. The retail sales report revealed that households have shaken off the summer doldrums:

Your Wealth Effect: – Are high yield bonds worth the risk? – With today’s extremely low interest rates many investors are considering purchasing high yield bonds, as a way to maintain and/or improve the income they receive from their investments. The question is: are investors receiving enough additional interest to offset additional risk?

Reuters:Warning: Now is not the right time to jump into municipal bonds. – For almost a year now, investors have been flinging money at municipal bonds like they were $20 iPads. But munibond experts warn that city bankruptcies in California, downgrades from ratings agencies and the possibility that a healing economy will produce rising interest are all band news for bond holders.

Bengal: 4 key reasons why, all else equal, a CEF should trade at a premium to its NAV. - There is more demand than supply for that CEF., The manager is viewed very favorably by the marketplace., The NAV is not reflective of the cost of assembling the portfolio., Most (but not all) of the CEFs that PIMCO has, have an ARPS (auction rate preferred securities) component that provides leverage to the shareholders of the CEF.

Businessweek: Investors piling into the most dangerous of the BRIC’s bonds - Money managers have piled $3.2 billion into Brazilian foreign and local currency bonds in 2012, nearly double 2011, according to Cambridge, Massachusetts-based EPFR Global.

123Jump: An interview with high yield bond fund manager Gary Russel - We like the high-yield asset class given we do not need a lot of economic growth in order to get equity-like returns; whereas, in equities we generally need more significant economic growth in order to see a sustained high level of returns. So, high-yield bonds have historically had more attractive excess returns in a low growth environment, such as today’s.

Scott Granis: The difference between bond yields and inflation is now as low as at any time since the 1970s - 30-yr T-bonds now offer only a 3% yield, at a time when inflation is running 2-2.5%. That’s a very small premium to insure against the possibility that inflation could outstrip bond yields at some point over the next 30 years.

David Merkel: The problem with using total return strategies to try and match long term liabilities – I remain a skeptic of clever investors trying total return strategies versus long term promises.  In the situations I have been in, it has not worked, and with bad management teams, it is another way to make things look good for a time, until things blow up. Good investing stems from matching assets to the eventual need to pay cash at a future date.  True for individuals and institutions.

Amanda Blitzdorf:Is there any more juice left in the junk bond market? – More and more investors have been attracted to the junk bond market as the bank interest rates are artificially low and the yields on the Treasuries trails inflation. Amid a continued drop in dividend payout, some financial experts warn there may be bubbles in the junk bond market.

Cate Long:The 30,000-ft view of muniland. – Amy Laskey, managing director of the Public Finance Group at Fitch Ratings, provides a 30,000 foot view of the current state of muniland.

Learn Bonds:What would Romney mean for municipal bond investors? – Governor Romney’s tax proposal is scarring some municipal bond market participants. He has proposed a zero percent tax rate on interest income, dividends and capital gains for households with incomes of less than $200,000 of gross income. Should Romney’s proposal become law, treasury and corporate bonds would become much more attractive from a yield perspective overnight.

BusinessWeek:Municipal bond insurance back from the dead after flat lining. – The municipal bond-insurance market which was left for dead after credit markets collapsed in 2008 is showing signs of a revival as increased competition from Build America Mutual Assurance looks to give Wilbur Ross something to think about.

QC Times: Illinois still hiring despite financial woes. – Illinois may have massive financial problems, but that doesn’t mean the state isn’t hiring. According to records compiled by the Comptroller’s office, the state has hired 1,203 employees since the beginning of the current fiscal year on July 1.

Bloomberg:DEFCON warning system for California munis. – California, where three municipalities have filed for bankruptcy since June, is working on an early-warning system to prevent more defaults by detecting signs of financial meltdown, state Treasurer Bill Lockyer said today.

Times Tribune: – Scranton fireman go cold as gas supply get’s cut off, but checks in the mail.Scranton fireman will have to go cold tonight because their local gas supply has been turned off for lack of payment. Scranton has been in a fiscal crisis for months, unable to pay its bills because of its inability to borrow money to cover a deficit budgeted for 2012. Let’s hope it doesn’t get too cold or they’ll have to start a fire.

Voice of San Diego:State Treasurer: Fire Poway bond staff. – State Treasurer Bill Lockyer used a keynote speech at a conference in San Francisco on Wednesday to blast the practice of school districts taking out high-interest, long-term loans called capital appreciation bonds.

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