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Last week the World Bank made news when they issued their first ever catastrophe bond. The $30m cat bond will be linked to earthquake and tropical cyclone risk in 16 Caribbean countries.
The new issue which matures in June 2017 and pays a coupon of 6.30% over six-month Libor, with a 6.50% floor, is the latest instance of yield-hungry investors leaping into this hottest of asset classes.
To see a list of high yielding CDs go here.
But there are signs the cat bond market is overheating. The Financial Times is reporting that, while the World Bank deal was making headlines, another issuer quietly shelved its offering.
According to the FT, just a day before the World Bank unveiled its $30m deal, Munich Re was supposed to have been completing its own catastrophe bond issue.
Instead, the world’s biggest listed reinsurer quietly pulled the plug on the transaction, which was set to have been about three times larger than the World Bank’s.
“Pricing and capacity targets could not be achieved,” it told investors.
Some market participants say the cancellation is tentative evidence investors are becoming increasingly wary, even as catastrophe bond issuance levels continue to set new records.
“There’s still lots of money coming in, but people are becoming a little bit more sensitive about the yields,” says James Vickers, chairman of Willis Re International, the reinsurance broker. “There are some straws in the wind.”
Todays Other Top Stories
ETF Daily News: – California debt upgrade puts these muni bond ETFs in focus. – After some pretty rough trading in 2013, the municipal bond market has found it easy going this year. Concerns about fluctuating interest rates and financial soundness that troubled the munis last year appear to have taken a back seat for the time being. And the reasons are demand-supply imbalance, falling interest rates and improving credit quality of issuers, resulting in an uptrend in the munis space.
Reuters: – June municipal bond supply rises to $33.35 bln. – Municipal bond issuance jumped to $33.35 billion in June, the highest monthly total so far in 2014, according to preliminary Thomson Reuters data on Monday.
Reuters: – Puerto Rico worries deepen on lawsuits, bond selloff. – Puerto Rico’s troubles continued to worsen on Monday after mutual funds holding about $1.7 billion in its debt sued the commonwealth while other investors sold the bonds on concerns the island’s finances could deteriorate further.
Reuters: – U.S. bond funds sue Puerto Rico, worried about bankruptcy threat. – U.S. mutual funds holding about $1.7 billion in Puerto Rico debt have sued the cash-strapped commonwealth, accusing it of passing a law modeled after the U.S. bankruptcy code that could undermine the rights of American investors.
Banking Sense: – How a 10-year Treasury bond works. – Bonds are a fixed income security offering an investor a specified return, during specific intervals, with a full repayment of the principal once it matures. A purchased bond lends money to the issuer, such as a municipality, corporation or the U.S. Government. The U.S. Treasury issues bonds to raise money to fund operations and pay U.S. Government debt. The most watched and invested bond is the popular 10-year Treasury bond.
About.com: – Second quarter 2014 bond market performance overview. – If the bond market’s strong first-quarter performance was surprising, the continuation of the rally through the second quarter proved even more so.
Indexology: – GOOAL! for mid-year Treasury and muni returns. – The month of June came quickly to a close and with it the half year 2014 index results. At the start of the year, expectations were for yields to be above 3% and climbing.
WSJ: – With markets at peaks, some say air feels thin. – Stocks and bonds are riding high as the second half of 2014 gets under way, but investors are having a hard time enjoying the view.
Income Investing: – Halftime 2014 bond scoreboard: Everybody is winning. – It’s halftime for financial markets in 2014 and unlike the zero-sum games of most calendar years this year is proving that everyone can win at the same time. Stocks, bonds, real estate, you name it, it’s gone up in value.
Business Recorder: – Long yields hit three-week lows. – US Treasuries yields dropped on Thursday as traders eyeing a possible slowing of American economic growth drove up prices for a fourth straight day. Yields of 10- and 30-year Treasuries touched three-week lows as investors, already surprised on Wednesday by data showing the US economy contracted more than previously thought in the first quarter, reacted to data showing short-of-forecast increases in US consumer spending.
WSJ: – U.S. Government bonds set for quarterly price rally. – Treasury bonds strengthened on Monday, headed for the second straight quarterly rally that continues to confound bears expecting prices to sell off.
WSJ: – U.S. government bonds end quarter on a high note. – Treasury bonds ended the last trading session of the second quarter on a high note. It was the first time the haven bond market lodged two straight quarterly price rallies since 2012.
Investment Grade Bonds
Donald van Deventer: – Motorola solutions tops the 20 best value bond trades with maturities of 20 years or more. – We rank the 20 best trades by our usual criterion, the credit spread to default probability ratio. The top 3 bond issues were bonds from Motorola Solutions, Newcrest Finance Pty. Ltd., and Amgen.
Reuters: – Oracle raises $10 billion in year’s no. 2 U.S. bond sale. – Oracle Corp. sold $10 billion of notes in the second-largest dollar-denominated corporate bond offering this year to help finance the purchase of Micros Systems Inc.
WSJ: – With debt yields low, firms dash for cash. – Corporate-bond markets performed well in 2014′s first half alongside an unexpected rally in U.S. Treasury debt. Now, many bond-fund managers worry their early gains are too good to last.
High Yield Bonds
Income Investing: – Junk Bonds: Attractive carry, but limited gains ahead. – UBS‘s wealth management arm strikes a familiar note in its second-half predictions for the high-yield bond market. Like a lot of strategists, UBS doubts junk bonds can muster much more in the way of gains. But like a lot of strategists, UBS doesn’t see much out there that looks better for now, and recommends investors stay overweight the high-yield market, if a bit less overweight than before.
Pensions & Investments: – Investing in emerging markets bonds in an unconstrained framework. – A benchmark serves a clear purpose in investment management as it provides a starting point for constructing a portfolio, guides how the strategy should be managed and allows investors to evaluate the performance of the active manager versus a passive alternative.
WSJ: – Investors trawl for yield in unexpected waters; Could icebergs lurk? – Investors are roaming the globe in search of decent returns, spurring a string of bond deals from some unexpected places. But some analysts think investors are taking on more hazard and consider that a worrying sign.
Pioneer Investments: – Seeking new opportunities in emerging markets debt. – Emerging markets, despite periods of volatility, have demonstrated their resilience to turbulence and we believe they will continue to offer opportunity for selective investors. There are three forces behind the resilience of the Emerging Markets.
Expert Investor: – Emerging markets comeback sustained in May. – Emerging market bonds and equities continued to enjoy steady net inflows in May, reinforcing a strong trend of renewed investor enthusiasm for emerging markets.
Businessweek: – Argentine bonds snap losing streak on debt mediator talks. – Argentine bonds rallied, snapping a three-day losing streak, after the government set a date to begin talks with a court-appointed mediator in its conflict with holdout creditors that threatens to cause a default.
Kiplinger: – 20 ETF picks to fill the gaps in your portfolio. – The right ETFs can be perfect for filling gaps in your portfolio. Do you need to beef up on foreign stocks? Want to make a bet on companies that will benefit from an improving economy? Looking for more income? We’ll guide you to solid funds for meeting your goals.
Preferred Stock Channel: – Kimco Realty’s class K preferred stock shares cross 6% yield mark. – In trading on Monday, shares of Kimco Realty Corp.’s 5.625% Class K Cumulative Redeemable Preferred Stock were yielding above the 6% mark based on its quarterly dividend (annualized to $1.4062), with shares changing hands as low as $23.04 on the day. This compares to an average yield of 6.85% in the “Real Estate” preferred stock category, according to Preferred Stock Channel.
Fox News: – Soon-to-be retirees need to keep an eye on this. – Interest rates aren’t expected to shoot up any time soon, but they can’t stay near record lows forever, and people closing in on retirement need to pay extra close attention.
Western Journalism: – Sad story of savings bonds. – There was a time when millions of dollars of U.S. savings bonds were sold in June — for graduation gifts, for wedding gifts, and just because of the patriotic feelings on the Fourth of July. Those days are long gone. The Treasury has yet to post sales figures for 2012 or 2013, amidst speculation that savings bond sales slowed to a trickle as a result of changes made in recent years.
— NorthernTrustAM (@NTInvest) July 1, 2014
— Cate Long (@cate_long) July 1, 2014
So by my count, Moody’s did a 2-step cut (Baa3 from Baa1), then 2 steps again (Ba2 from Baa3), and now 3 levels to B2. #PuertoRico
— Brian Chappatta (@BChappatta) July 1, 2014