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There are a growing number of large Wall St investors, including BlackRock and Pioneer Investments, going against Bill Gross’s advice to buy short and intermediate maturity bonds on bets that an accelerating economy raises questions about the Federal Reserve’s promise to keep rates low.
Gross argues that moving toward shorter-maturity debt is a beneficial way of alleviating interest rate sensitivity in bond portfolios during a rising-rate environment.
The Federal Reserve has promised to keep its target policy rate near zero until well after the unemployment rate drops below 6.5%. But as signs emerge that the economy is picking up steam, the market is beginning to question the length of time before the Fed jacks up rates.
“How long is the longer run?” asked Jeffrey Rosenberg, BlackRock’s chief investment strategist for fixed income, told MarketWatch. “This is really impactful to the two-to-five year part of the curve. If you’re hiding out in the short duration strategies, make sure you are in the ultra-short duration strategies.”
BlackRock is advising investors to stay away from bonds with maturities between two and five years, and instead focus either on bonds with maturities that are less than two years away, or longer-term maturities, such as bonds maturing in 10 to 30 years.
The bottom line is, it’s not what the Fed does, its what the Fed is perceived to do that is going to make the difference. “Even if the Fed doesn’t make noise about moving rate hikes closer, investors will begin to interpret everything they say and begin to become fearful of the curve,” said Michael Temple, director of U.S. credit research at asset-manager Pioneer Investments.
Todays Other Top Stories
USA Today: – Judge denies Detroit’s proposed swaps settlement. – A proposed $165 million settlement to pay off two banks that entered into a financing agreement with the city almost a decade ago is too expensive and won’t be approved, a U.S. Bankruptcy Court judge ruled Thursday.
MuniNetGuide: – Municipal Bond Disclosure Continues to Evolve with GASB Statements 67 and 68. – While municipal bond market participants have been focused on distressed credits – a new reporting standard is garnering industry attention. The Governmental Accounting Standards Board has issued two regulatory standards - GASB Statement 67 and GASB Statement 68, which will become effective for fiscal years ending on June 15, 2013 and June 15, 2014, respectively – that will dramatically restate state and local government pension liabilities.
MarketWatch: – Puerto Rico risk chatter abounds as bonds hold up. – There was a lot of chatter about Puerto Rico Wednesday, particularly on the heals of a conference about the financially-troubled commonwealth that featured some well-known municipal market participants.
CNBC: – Here’s what you need to know in the muni bond market. – A volatile stock market could be the best friend to the municipal bond market, which has suffered through a shaky year amid a deluge of ugly headlines.
Reuters: – Puerto Rico bond rally fizzles on court stay of pension reform. – Puerto Rico bond prices dropped sharply on Wednesday after the Caribbean island’s top court halted the rollout of cost-saving reforms to a teachers pension system meant to help heal Puerto Rico’s finances.
LearnBonds: – What is and what shall be. – As long as inflation remains tame, the Fed will keep rate policy accommodative, regardless of what the market views as encouraging employment trends. The Fed does not want to hear employment conditions are improving.
FT: – Treasury market poised for jump in foreign inflows. – The consensus among strategists at the start of 2014 was that stocks would make further gains and bonds would lose ground, but already US Treasuries are putting that thinking to the test.
WSJ: – Companies power up a chilly bond market. – The U.S. corporate-bond market is showing signs of life after a sluggish start to 2014, with highly rated companies selling about $15 billion in debt on Wednesday in the busiest day this year.
MoneyBeat: – U.S. company credit ratings expected to be generally stable in 2014. – Credit ratings of U.S. companies are expected to be generally stable in 2014, Standard & Poor’s Ratings Services said on Thursday, though businesses with so-called junk grades could face more challenges than those rated as investment grade.
Bloomberg: – Firms tripling junk returns lure most since ’07: Credit markets. – Firms that use borrowed money to lend to the smallest and riskiest companies are attracting cash at the fastest pace since before the crisis, wooing buyers with returns that are triple those of the broader junk-debt market.
Forbes: – Best buy high yield bonds sink in trading, CDS widens as shares plunge. – Bonds backing Best Buy traded lower, credit protection costs ballooned, and the company’s shares plunged after it reported a decline in holiday-period sales. Total revenue for the nine weeks ended Jan. 4, 2014 were $11.45 billion, for nearly a 3% decline from $11.75 billion in the nine weeks ended Jan. 5, 2013, according to a company statement.
Bond Vigilantes: – Tomlins’ guide for getting the best from High Yield in 2014. – 2013 was another decent year for returns in the high yield market. The US market returned 7.4%, with Europe a little way ahead at 10.3%. Bonds saw solid income returns, low default rates and a small capital gain as a tightening in credit spreads was enough to overcome weakness in the government bond markets. Once again this illustrated how high yield can be one of the few fixed income asset classes that can generate positive returns within a rising interest rate environment.
BusinessWeek: – RBS to UBS boosting junk-debt teams once gutted. – Dealers from Royal Bank of Scotland Group Plc to UBS AG that gutted their credit units after the 2008 financial crisis are now hiring to trade junk debt, seeking to tap into the biggest fixed-income gains during the past year.
MarketWatch: Emerging market bonds and your retirement portfolio. – Although it has been a winding road for nearly all fixed-income investors over the past year, emerging market bond investors have especially had their fair share of white-knuckle moments.
BusinessWeek: Emerging markets dodge Fed tapering in best bond-sale start. – Borrowers in developing nations are flooding markets with a record amount of bonds before reductions to Federal Reserve monetary stimulus drive up funding costs.
Artemis: – Plenum launches leveraged cat bond strategy, new share classes. – Zurich based catastrophe bond investment manager Plenum Investments is expanding its reach with the launch of a higher return leveraged cat bond investment strategy as well as new institutional and trailer fee clean retail share classes for the Plenum Cat Bond Fund.
LPL Financial: – Why own bonds? – A look back at prior stock market pullbacks illustrates how bonds have historically provided good diversification benefits.
Smarter Investing: – Bank loans instead of high-yield bonds as rates rise? – After rising sharply in 2013, yields on the 10-year Treasury note have paused at 3% following a weak December jobs report, but the long-term trend for interest rates still looks to be higher.
Real Estate Investment Trust REITs
Bloomberg: – Why mortgage REITs deserve some love in 2014. – There’s nothing sexy about mortgage real estate investment trusts. They can’t talk to you like Siri or deliver packages with drones like Amazon envisions. But they currently yield 13 percent while Treasury bonds yield only 3.8 percent.
MarketWatch: – BlackRock’s Larry Fink: There are two important rotations in the bond market. – BlackRock Inc. CEO Larry Fink drew attention to an asset-allocation theme that’s gotten a lot of attention recently, and that we’re likely to hear more about in the coming year: Institutional investors are taking profits in equities and switching back to long-term bonds.
Investors.com: – ETF investing strategies: Seven new ETFs in 2014. – Exchange traded fund providers have kicked off the New Year by rolling out a batch of new funds onto the stock market.
Business Standard: – Tilt towards long-income funds. – Income-focused investors looking for some capital appreciation could re-visit gilt and long-term bond funds once again. These funds took a big knock last year when interest rates shot up suddenly, but now they are poised to make big net price gains if the rate cycle starts to reverse.
Morningstar: – Seeking to defend against rising bond yields? Pick your poison carefully. – Given that they’re often considered the safe, boring part of investors’ portfolios, bonds have certainly produced more than their fair share of angst over the past few years. Having enjoyed the tailwind of declining yields for nearly three decades, many bond investors have been fretting about the day when that tailwind would become a headwind.
Gross: Without credit expansion (and QE), risk assets are most at risk.
— PIMCO (@PIMCO) January 16, 2014
*DETROIT LOSES BID TO PAY BANKS $165 MLN TO END SWAPS CONTRACTS WITH BOFA, UBS …woah
— Brian Chappatta (@BChappatta) January 16, 2014
Oddly yield curve for Puerto Rico GOs peaks at bonds maturing 2030 at 9.57% via MMD. Curve declines after. Using 41s not good #muniland
— Cate Long (@cate_long) January 16, 2014