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Following on from yesterdays article, with Jeff Gundlach warning investors that junk bond markets were getting a little frothy. Today we have Seth Klarman hedge fund manager at European based hedge fund Baupost Group, warning that “bubbles are inflating in junk-bond issuance”.
Klarman’s warning comes as investors enthusiastically buy corporate debt, which offers at least some yield in a world of very low short-term interest rates. In the week to March 5th investment-grade bond funds received inflows of $1.8 billion and junk-bond funds had inflows of $1.1 billion, according to Bank of America Merrill Lynch.
The buying frenzy is being fed by companies eagerly refinancing their debt. Most bonds have a “call” provision, allowing the issuer to redeem the issue, usually at a price above face value. These calls are most likely to be exercised when interest rates have fallen; companies can then refinance their debt more cheaply, therefore locking in low rates.
With interest rates at record lows, the bond default rate is also at an all time low. But as interest rates start creeping up, the default rate won’t be far behind, causing junk bond prices to reverse.
Nobody knows for sure when that will happen. But Klarman says, the more money that floods into fixed income, the more dangerous any reversal could be.
Todays Other Top Stories
ETF.com: – 2 ETF plays for Puerto Rico munis. –Puerto Rico has been in the limelight recently because it had its credit rating downgraded due to its ongoing financial challenges centered on heavy loads of debt. The munis were auctioned at an interest rate of over 8 percent. They mature in 2035, and were sold with a coupon of 8 percent and a yield of 8.72 percent—attractive yields for income-focused investors.
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’.
Inquirer.net: – Developing the municipal bond market. – Municipal bonds, more popularly known as “munis” abroad, are debt obligations issued by states, cities, municipalities, state enterprises and other government entities below the national level.
Bloomberg: – Ex-CDR Chief Rubin spared prison in muni bid-rigging case. – CDR Financial Products Inc. founder David Rubin was spared prison for his role in a municipal bond bid-rigging scheme that involved employees of some of the world’s biggest financial institutions.
Philly.com: – Daily Money Tip: Two tips about municipal-bond investing. – First, for investors with a high risk tolerance, Puerto Rico debt yielding about 8 percent tax-free has drawn some sophisticated buyers. Second, a new study out of S&P Dow Jones confirms that Wall Street is getting one over on us when it comes to municipal bonds: If you try to buy individual munis yourself, you are getting hosed on the price.
Bloomberg: – Chicago pension evokes Illinois before Python slain. – The cartoon snake, which Illinois Governor Pat Quinn used to symbolize retiree costs that are strangling the state’s finances and undermining its credit rating, is now smothering Chicago. The third-most-populous U.S. city had its general-obligation grade cut by Moody’s Investors Service last week to three levels above junk. Excluding bankrupt Detroit and Stockton, California, that’s the lowest among the 90 biggest U.S. cities, data compiled by Bloomberg show.
LearnBonds: – Utility Bonds – Meaning, merits and risks. – A quick primer on utility bonds, what are they and what are the relative risks of owning them.
Forbes: – Right fund for you: Closed end or open end fund? – Open-end and closed-end funds are vehicles that enable investors to invest in professionally-managed portfolios of securities. Although they have some features in common, there are some major differences between open-end funds – So which is the best investment vehicle for you?
4Traders: – Treasury bonds gain ground for third session. – Treasury bonds gained for a third straight session on Wednesday as concerns over the global growth outlook boosted the allure of the haven market.
Reuters: – Yields to remain low in ‘expensive’ sovereign bond market. – Major sovereign bond yields will rise only slightly over the coming year as global growth concerns persist, a Reuters poll found, despite expectations for interest rates to head higher in some developed nations next year.
MarketWatch: – Uncertainty pays in a white-hot corporate bond market. – Everyone and their mother seems to be piling into the white-hot corporate bond market these days, which means opportunities can be difficult to find. But for individual investors, one place to look may be a part of the market that the big dogs of the bond market tend to ignore.
FT: – Strong demand for ‘junk’ bonds erodes investor protection. – Insatiable investor demand for higher yielding securities has helped push protection for buyers of junk-rated bonds to its lowest level on record, the rating agency Moody’s has warned.
Citywire Global: – Start making your HY exit plan, says $10.2bn bond manager. – JPM’s Bill Eigen has warned investors it is time to seriously consider dropping high yield exposure as spreads are nearing historically tight levels.
Bonddad Blog: – Junk bond ETF far outperforming other bonds. – Above is a one year comparison chart of several major bond market ETFs. Keep in mind that some are total market (JNK, MBB and MUB) and some are duration specific (IEF and VCIT), making the comparison a little weak but not entirely moot.
BusinessWeek: – BlackRock junk ETFs push buyers to dark corners. – Buyers of junk bonds are retreating to the market’s more obscure securities as the rise of exchange-traded funds fuels concern that such fast-moving cash is exacerbating price swings.
CNBC: – Are emerging market bonds a better deal than stocks? – Bargain hunters eyeing the drop in emerging market equities may want to shift their focus to the segment’s unloved bonds instead.
Bloomberg: – Wall Street’s Venezuela bond bulls can’t convince Loomis. – Some of Wall Street’s biggest banks say that Venezuela’s new currency system is a signal to buy the nation’s bonds. Insight Investment Management and Loomis Sayles & Co. aren’t convinced.
Duncan Rolfe: – On fixed income Strategies, and a beacon of positive light at PIMCO. – There are two alternative strategies you can implement besides traditional bonds to continue to reap the benefits of fixed income securities in your diversified portfolio: bank loan notes and high yield bonds.
Morningstar: – An Aggressive ETF Portfolio for Retirement. – We make a minor adjustment and check up on the performance of this ETF-oriented portfolio ideal for retirees with long time horizons.
MarketWatch: – Five things that could go wrong for markets: Bank of America Merrill Lynch. – Bank of America Merrill Lynch chief strategist Michael Hartnett has zeroed in on five potential monsters under the bed for investors.
Business Standard: – Debt funds are in a sweet spot. – Re-calibrate your debt portfolio to take advantage of the high yields in the debt market.
Reuters: – U.S. bond funds post $3.7 billion weekly inflow, biggest since May. – Investors in U.S.-based mutual funds poured $3.7 billion into bond funds in the week ended March 5, as bond yields remained stable while geopolitical tensions lingered in Russia and Ukraine, data from the Investment Company Institute showed on Wednesday.
Kiplinger: – Fund investors reveal their lousy timing. – Investors lagged the average mutual fund by an average of 2.5 percentage points per year over the past ten years. How can you do better?
David Fabian: – ETF Investors chase risk despite defensive signals. – One of the benefits of ETF investing is that the landscape is so transparent. Every ETF investor knows exactly what they own at all times and you can get remarkable statistical data from a variety of online sources that track fund metrics.
ETF.com: – International high yield-bond launch. – State Street Global Advisors, the ETF issuer behind the $10 billion SPDR Barclays High Yield Bond ETF, today is launching an international version of the successful flagship high-yield credit fund.
Gross: When markets aren’t volatile, sell volatility. Next week’s #Fed will reinforce attempt to stay the course of low vol.
— PIMCO (@PIMCO) March 13, 2014
It is interesting to me that other muni folks see Puerto Rico, Chicago, etc as a supply and demand story. Obviously some elements of that.
— Bond Girl (@munilass) March 13, 2014
It is refreshing that Fischer says the Fed exit has begun. Calling the reduction in QE as an exit is unusual for a Fed speaker.
— Mike Jackson (@bondscoop) March 13, 2014