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James (Jim) Grant, founder and publisher of Grant’s Interest Rate Observer newsletter, one of the most respected financial journalists in the world. Has warned about distortions in the price of junk bonds, the low rated corporate bonds that income starved investors are buying by the bucket load.
The “bubble” in asset prices, has been driven by the Fed’s Quantitative Easing program. By buying financial assets from commercial banks and other private institutions, the Fed has raised the prices of those assets therefore lowering their yield.
With yields being kept artificially low, investors have been forced to throw caution to the wind and delve into the lower ranges of the ratings spectrum. With many not fully understanding, or turning a blind eye to the risks.
“The Federal Reserve has gone way too far in its massive stimulus program” Grant told Steve Forbes in an interview.
Despite the Fed curbing its monthly bond purchases to $45 billion from $85 billion last year, its balance sheet has grown to $4.3 trillion. And the central bank has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.
“It seems the Fed’s full-court press on financial markets and pricing thereof has induced a deep complacency with respect to financial assets and has also introduced a sharp degree of optimism or what we might call even inflation in the financial markets.”
“There has been a succession of interventions since 2007. And they accumulate to immense, improbable, unimaginable amounts of digitized, immaterial money. And they also have given us immense kind of incentives to invest and speculate in new and arguably riskier ways.”
Fed officials themselves are worried about complacency in financial markets. “Volatility in the markets is unusually low,” William Dudley, president of the New York Fed, said after a speech last week, according to The Wall Street Journal.
“I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they’ll take more risk than really what’s appropriate.”
Todays Other Top Stories
Bloomberg: – Muni yields set for biggest weekly jump since February on supply. – Yields in the $3.7 trillion municipal market headed for the biggest weekly increase in four months as investors prepared for rising bond issuance while demand for state and city securities ebbed.
Narwhal Capital: – Muni bond inventory is scarce. – We’ve always had an affinity for municipal bonds. For clients with any tax sensitivity, a tax-free, income-producing investment vehicle makes an awful lot of sense—especially if we can appropriately determine the risk associated with the issue.
Vanguard: – Municipal bonds and your portfolio. – Taxes, quality, risk: There are many factors to consider when building your portfolio. Vanguard fixed income experts Daniel Wallick and Chris Alwine describe the important role municipal bonds can play in a diverse investment strategy.
NY Muni Blog: – Deadline approaching for municipal bond underwriters to take advantage of SEC initiative. – The deadline is rapidly approaching for issuers and underwriters of municipal bonds to avail themselves of the voluntary reporting provision of the Municipalities Continuing Disclosure co-operation (MCDC) Initiative.
ETF Trends: – 7 Reasons to include muni ETFs in your portfolio. – As more people look at options to diversify their investment portfolios, investors should consider including municipal bond exchange traded funds to expand their fixed-income allocations and help manage taxes.
TheStreet: – Good luck getting profits in $4 trillion municipal bond market. – It’s hard to get solid bid and ask information. The cost of buying or selling is high. The market is not very liquid. But if you focus on bonds in your own state, you can get a tax-free profit as part of a $4 trillion market whose prospects in the near term are good.
Bloomberg: – Waking up from fiscal nightmare that’s Chicago. – To show how badly public pensions have been short-changed, Securities and Exchange Commissioner Daniel Gallagher mentioned a place where every household owes $88,000 for promises the government made to retirees.
Oppenheimer Funds: – New ways to think about muni credit ratings. – To show how badly public pensions have been short-changed, Securities and Exchange Commissioner Daniel Gallagher mentioned a place where every household owes $88,000 for promises the government made to retirees.
Bloomberg: – NYC Bond sale gives investors vote on de Blasio budget. – New York City plans to issue $850 million of general-obligation bonds this week, the first debt sale since Mayor Bill de Blasio’s proposed budget was called credit negative by Moody’s Investor’s Service.
Cate Long: – A visit with BlackRock’s muni managers. – Peter Hayes leads the BlackRock Municipal Bonds Group. He is also a member of the Americas Fixed Income Executive Team and BlackRock’s Global Operating Committee. Hayes is muniland’s biggest kahuna. When he and his team talk, people listen.
Market Realist: – Key differences between investment-grade and high-yield investments. – Corporate debt is divided into investment-grade and high-yield on the basis of the credit risk associated with the issuer. Credit rating agencies issue ratings to corporations and debt issuance on the basis of associated credit risk.
Bloomberg TV: – Bond dealers fight for bond sales assignments. – Bloomberg’s Lisa Abramowicz reports on bond underwriting and U.S. corporate bond sales on Bloomberg Television’s “Bottom Line.”
ETF.com: – 5 main factors driving Treasury yields. – The bond market hasn’t exactly behaved like most people would have thought coming into 2014. Contrary to expectations for higher rates as the Fed tapers its monthly bond purchases, investors have instead been faced with dropping Treasury yields, now flirting with multi-month lows.
Bloomberg: – Treasuries fall as Morgan Stanley recommends underweight. – Treasuries fell a second day before data this week that economists said will show improvement in the U.S. labor market and consumer confidence as Morgan Stanley recommended going “maximum underweight” U.S. debt.
WSJ: – U.S. Government bonds pull back. – Treasury bonds pull back as looming new debt sales and upbeat data out of China and Japan sapped demand for safe assets.
WSJ: – U.S. Debt holds broad appeal. – Investors across the globe are scooping up Treasurys, an asset whose main selling point until recently was safety.
Investment Grade Bonds
Investing.com: – Worsening risk/reward fundamentals in U.S. corporate credit. – US corporate credit markets, particularly high yield bonds, are becoming quite frothy, as risk/reward dynamics continue to worsen. Here are some key indicators.
Markets Media: – Corporate bond liquidity to remain. – The liquidity imbalance in corporate bonds may remain for the foreseeable future according to consultancy Greyspark Partners.
BNN: – Hank Cunningham’s top corporate bond picks. – Hank Cunningham, Fixed Income Strategist at Odlum Brown picks his top corporate bonds for June.
High Yield Bonds
LearnBonds: – A High-yielding alternative in a low-yielding world. – This high-yield bond fund, which recently surpassed $1 billion in assets under management, focuses on single-B and triple-C rated corporates, with slightly more than half its assets currently in B and B-minus rated bonds.
Against Crony Capitalism: – Jim Grant warns about junk bonds. – In the interview with Forbes publisher Steve Forbes, Jim Grant refers to the mess the Fed is making and specifically warns about distortions in the price of junk bonds, the low rated corporate bonds that income starved investors are always tempted to buy.
IO&C: – Why you shouldn’t give up on emerging markets. – There are still opportunities in both emerging market debt and emerging market equities according to portfolio managers at global fund manager Neuberger Berman.
Bloomberg: – Investors’ next big thing: Emerging market debt. – Bloomberg’s Matt Miller and Lisa Abramowicz examine investing in emerging market debt. They speak in “On The Markets” on Bloomberg Television’s “In The Loop.”
Pensions and Investments: – Pension funds eye illiquid catastrophe bonds. – Significant demand for insurance-linked securities, in particular catastrophe bonds, has driven down yields and taken some of the luster off the once-shining beacons of uncorrelated assets in a pension fund’s investment portfolio.
AllianceBernstein: – We’re staying the course in bonds with intermediate-duration portfolios and higher yielding bonds. – Going forward, we expect to see healthy economic growth—one of many catalysts for the resurgence of corporate mergers and acquisitions. Our positive outlook is leading us to maintain a cyclical tilt in stocks, which are overweight in our accounts with Dynamic Asset Allocation.
Bloomberg: – Gross’s bulls butt heads with bears in great bond debate. – The gulf between bulls and bears has never widened so quickly in the $12 trillion market for U.S. government bonds.
SSRN: – How long might an active bond ETF’s “best ideas” outperformance window last? – One reason to launch an active bond ETF is a manager’s belief that an opportunistic fund might be able to exploit highly attractive pockets of opportunity buried in the recesses of an existing large and successful bond mutual fund. As a result, a “best ideas” focused active bond ETF could outperform its “parent” strategy. However, there is an interesting nuance.
Focus on Funds: – Fund flows: What’s hot, not. – Emerging market debt funds attracted $2.2 billion in investments in the latest week, the largest figure since January 2013. While that marks the 10th week of inflows as investors search for yield, it’s a drop compared to the 10-month, $76 billion emerging-market selloff that began in May.
Business Standard: – Bond funds worldwide attract $4.3-bn inflows over week. – Stock mutual funds posted $8 billion in outflows, while stock exchange-traded funds attracted $6 billion in inflows, according to the report, which also cited data from fund-tracker EPFR Global.
GROSS: Modern Financial Capitalism depends on positive yield curves – even more when highly levered. The New Neutral will be near 0% real.
— PIMCO (@PIMCO) June 9, 2014
$ELD is a pretty reasonable allocation for emerging markets local debt
— David Schawel (@DavidSchawel) June 9, 2014