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DoubleLine founder Jeffrey Gundlach sees trouble brewing in the high yield bond market. Gundlach told investors during his monthly webcast, that he still sees junk bonds as overvalued. “With the average junk bond yielding 5.3% and trading above 104 cents on the dollar”, lofty junk bond prices could lead to a ‘debacle’.
“One of the reasons why junk bonds have gotten so expensive: they went up in value when other bonds lost value last year,”, pointing out that the average yield for bonds rated double-B is just 4.2%, while 30-year Treasuries are yielding over 3.7%. With junk yields so low, “this relationship suggests to me that junk bonds will no longer have a negative correlation to Treasury bonds when interest rates rise unlike 2013,” Gundlach said.
And that’s not the only problem, Gundlach say’s that the entire market is trading above the 103-cent level at which many bonds can be called by their issuers, which impacts how bonds are valued.
“There’s no way for prices to go up at this point,” Gundlach said. “If a bond is priced to call, and rates rise, it might not get called. People may think they own a short-term portfolio but if interest rates rise it might turn into a 10-year bond instead. It would also roll up the yield curve…. This could be a debacle, and the liquidity risk could be quite high given this call-to-maturity situation…
I’m not worried as much about interest rate risk and credit risk [in junk bonds], I’m worried more about liquidity risk and naively owned positions.”
In response, Gundlach says he’s cut the amount of high-yield holdings in DoubleLine’s core bond fund to just 3%.
Todays Other Top Stories
Businessweek: – Puerto Rico increases bond offering by 17% to $3.5 billion. – Puerto Rico, which had its debt cut to junk last month, set prices on $3.5 billion of general obligations after boosting the deal by $500 million as orders eclipsed the amount of securities offered. The bonds gained in initial trading.
Businessweek: – Muni-bond markups about double those on corporate debt, S&P says. – Investors in the $3.7 trillion municipal-bond market pay markups to brokers that are about twice as high as those on corporate securities, according to Standard & Poor’s Dow Jones Indices.
Morningstar: – Consider paying a premium for municipal bonds. – Municipal (muni) bond investors generally prefer to purchase muni bonds at or near par value. But with interest rates at historically low levels, most existing muni bonds available for purchase are priced well above their par value. Muni bond investors may be overlooking these premium bonds because of a misperception that if they pay the premium, their returns will be lower at the bond’s maturity.
CNBC: – Detroit’s bankruptcy gain may be others’ pain. – The city of Detroit looks to emerge as at least a survivor if not a winner from its bankruptcy, with bondholders and future municipal borrowers the biggest losers.
ValueWalk: – The upside to Detroit muni bonds. – Detroit’s bankruptcy proceedings could solidify bondholder rights, and creates a few unusual investments in the meantime.
WSJ: – Puerto Rico buys some time with bond sale. – Hedge funds and other investors snapped up $3.5 billion of high-yielding, tax-free Puerto Rico bonds, signaling strong demand for the investments and buying time for the strapped U.S. commonwealth to put its fiscal house in order.
Bloomberg: – Connecticut offers most general-obligations since September. – Connecticut, home to hedge fund capital Greenwich, is selling $400 million in general-obligation bonds today and tomorrow, its largest such sale since September.
Investment News: – Muni regulator pursues rule to increase price transparency. – MSRB proposal modeled on Finra’s for equity and fixed-income markets; ‘promote market competition and efficiency’.
WSJ: – Long-term mutual fund inflows $10 billion in latest week. – Long-term mutual funds reported estimated inflows of $10.29 billion in the latest week, according to the Investment Company Institute, as investors once again added funds to each asset class.
the Observer: – Why invest in bonds and treasury bills? – When it comes to investment, most of us do very little research before putting money in a particular investment. To many, hearing that someone has earned big is often sufficient research. Over the last decade or so, a number of corporate companies have issued shares to the general public. Some of these listings led to a doubling in share values in weeks.
Businessweek: – Pimco cuts government debt on bets Fed ends buying by year-end. – Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of Treasuries and U.S. government debt in February as turmoil in Ukraine fueled haven demand and investors bet the Federal Reserve will conclude bond purchases this year.
SFGate: – Treasuries rise as Gundlach says yields will fall; Gross sells. – Treasuries rose for a third day as DoubleLine Capital LP’s Jeffrey Gundlach said yields are poised to fall further and Pacific Investment Management Co.’s Bill Gross cut his holdings of U.S. government-related debt.
FT: – Verizon Communications returns with $4.5bn bond sale. – Verizon Communications returned to capital markets on Monday with the sale of $4.5bn in bonds, in its first debt offer since a blockbuster corporate deal last year.
WSJ: – Corporate debt feeds yield hunger. – Global corporate bonds are in fine fettle, even as stock markets struggle to propel themselves higher. No matter the problem—whether it be jitters over China’s financial system, Russia’s incursion into Ukraine, or doubts about the U.S. recovery—corporate bonds seem to benefit. The search for yield shows no signs of flagging yet.
LearnBonds: – Playing it smart with high yield bond funds. – With default rates continuing to trend near historical lows, high yield bonds continue to provide attractive yields for aggressive fixed income investors with relative safety of principal. The risk of high yield bond funds, while seemingly dormant for the time being, should not be underestimated by the average retail bond investor.
AllianceBernstein: – Reaching for yield: Worth the risk? – Investors seeking more robust returns in a lower-interest-rate environment often look to high-yield bonds for answers. But it’s critical that they don’t reach too far down the credit spectrum in search of higher yields—as tempting as it may be.
Income Investing: – Junk-bond covenant quality hits record low – Moody’s. – The quality of covenants that govern high-yield bonds fell to a record low in February, Moody’s reports today, after it had improved for the previous three months.
ETF.com: – Fed fuels doubling of EM debt. – On Tuesday, the European Central Bank released a working research paper that examines the relationship between the Federal Reserve’s quantitative easing and global bond issuance. The results are stunning. The authors conclude that emerging market corporations have issued twice as much debt as a result of QE than they otherwise would.
Donald van Deventer: – The 20 best value bond trades of 20 years maturity or longer. – We find the best-value non-call senior fixed rate 20 year or longer maturity bond trades on March 10, 2014 were issued by the following firms.
Citywire: – M&G’s Woolnough: Buy bonds the day rates rise. – Leading bond fund manager is in favour of rising interest rates as it would be a bullish statement on the economy.
Dimensional: – Short term muni bond portfolio. – This Short-Term Municipal Bond Portfolio is a no-load mutual fund designed to provide current income that is exempt from federal personal income taxes and to preserve investors’ principal.
Smarter Investing: – Preparing the stable high yield portfolio for higher rates. – The Stable High Yield portfolio has lagged the Barclay’s U.S. Aggregate Bond Index over the past year, primarily because of the decline of its mortgage real estate investment trust holdings in the first half of 2013.
ETF.com: – 5 Top-performing active ETFs year-to-date. – The ETF market is predominantly passively managed—of the 1,570 U.S.-listed ETFs today, only 84 are actively managed, with combined assets of around $15 billion. Still, several active ETFs hold their own against passive funds, and some of the best performers are actually beating their indexed counterparts so far this year. In this post we list the five best-performing active ETFs so far in 2014, in ascending order.
CNBC: – Are ETFs the Amazon.com of funds? – Over the past two decades, financial advisors, institutions and do-it-yourself investors have pumped billions of dollars into exchange-traded funds, turning what was once an obscure corner of the investment business into “the Amazon.com of the fund world,” as one expert sees it.
rally continues! #PuertoRico most actively traded. 8s of ’35 down to 8.33% today from yesterday’s 8.591%.
— Taylor Riggs (@TaylorRiggsMuni) March 12, 2014
— Muni Market Advisors (@Muni_Mkt_Advis) March 12, 2014
Who said you can’t get yield in fixed income today? Mexico just priced it’s 100 year bond at 5.75%. Step right up.
— Mike Jackson (@bondscoop) March 12, 2014