Laddering Munis Won’t Guard Against Rising Rates and Today’s Other Top Stories

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Investors looking to protect their portfolios from the threat of rising rates are going about it all wrong according to AllianceBernstein’s Terrance T. Hults. Investors who build laddered portfolios will be disappointed—by locking in low yields with traditional ladders or by hidden risks of higher-yielding ladders said Hults.

  To see a list of high yielding CDs go here.  

Laddered portfolios are built using bonds with maturity dates evenly spaced across several months or years so that as the bonds mature the proceeds are reinvested at regular intervals. The more liquidity an investor needs, the closer together his bond maturities should be.

Such portfolios are assumed to be simple, provide return certainty and capture higher yields as interest rates rise. “They’re definitely simple, and they do provide a relatively certain return. But in today’s low-yield environment, that return is likely to be locked in at below-inflation yields for the next few years.” Hults writes. “A portfolio laddered from one to 10 years yields only about 1.5% before accounting for the costs of trading and other annual fees. At that low yield, there’s little chance to beat even a modest rate of inflation.”

“The simplicity of laddered portfolios is appealing. Unfortunately, in return for simplicity, an investor either 1) locks in historically low yields and is likely to lose money after accounting for inflation over the next couple of years; or 2) increases his yield and takes on risks that should be actively managed.”

In the end, we think investors can earn more after-tax income and total return by stepping off the bond ladder and placing their bond portfolios in the hands of an experienced active manager.

 

Todays Other Top Stories

Learn Bonds

LearnBonds: – The importance of Treasury inflation protected securities (TIPS). – In several of the posts I have written for LearnBonds in the past I have discussed the importance of Treasury Inflation Protected Securities or TIPS in trying to interpret what the bond markets are trying to tell us. I have focused primarily on the 10-year TIPS because it is a longer-term maturity and is closely watched by many people that closely follow the financial markets.

 

Municipal Bonds

Reuters: – Without a net: Oppenheimer has $4 billion in uninsured Puerto Rico debt. – OppenheimerFunds’ municipal bond portfolios hold $4 billion in uninsured Puerto Rico debt, leaving them open to bigger potential losses than rivals as the Caribbean island’s fiscal problems escalate.

Bloomberg: – Bond fee disclosures sought by SEC to end 38-year debate. – After a 38-year debate on how to make trading costs for corporate and municipal debt transparent, regulators are making another attempt at forcing dealers to disclose how much they earn on the transactions.

Chicago Tribune: – Puerto Rico bonds crash high-yield municipal debt party. – It looked like there was no stopping the runaway returns for high-yield U.S. municipal bonds earlier this year. But that has all come to a screeching halt in the past few weeks thanks to a bombshell coming out of the Caribbean.

Bloomberg: – Puerto Rico could roil munis as investors unload, Citigroup says. –  The municipal market’s strongest start since 2009 may be in jeopardy as developments in Puerto Rico bonds increase price swings, Citigroup Inc. said.

 

Green Bonds

Guardian: – Green bonds market grows by 60% in a year. – The market for green bonds has grown 60% this year compared to 2013, surpassing expectations and leading experts to say a niche has now become mainstream.

 

Treasury Bonds

WSJ: – China plays a big role as U.S. Treasury yields fall. – Investors wrestling with the mysterious U.S. bond rally of 2014 got a clue about where to look: China.

Reuters: – Weak housing data spurs more buying of U.S. Treasuries. – U.S. Treasuries rose on Thursday after disappointing U.S. housing data showed the slowest pace of groundbreaking in nearly a year, driving yields lower and reinforcing a view that U.S. monetary policy will remain loose well into 2015.

 

Investment Grade Bonds

Donald van Deventer: – Transocean Ltd. bonds: High risk, low return. – Transocean Ltd. default probabilities have dropped in the last six months, but the firm still has a 9.00% probability of default within 10 years.

FT: – Bank bonds gain edge on stocks as risk factor fades. – Customers are renowned for being loyal to their bank. For investors the divergence in equity and bond performance for the US banking sector this year shows how sticking with one asset class can cost them.

FT: – Bank debt sales leap on strong investor demand. – Sales of investment grade bonds by financial institutions have jumped this year as global banks turned to the US capital market, seizing on low borrowing costs and investors’ appetite for high-quality corporate debt.

Market Realist: – Corporate debt reacts to FOMC minutes and Europe’s banking stress. – In a week of reversals, many trends changed course for lower-rate debt investors in the week ending July 11. While weekly issuance volumes for high-yield debt (HYG) securities surged by ~42% week-over-week (or WoW) to $6.78 billion, yields on high-yield debt also increased, leading to negative returns on the asset class over the week.

 

High Yield Bonds

Bloomberg: – Top junk loser undone by equipment costs. – Creditors are losing confidence in 21st Century Oncology Holdings Inc. (ICC), driving its bonds to the deepest loss among junk-bond issuers in the U.S. this month as the government considers reducing payments to cancer centers.

 

Investment Strategy

Business Recorder: – Foreigners buy $19 billion in U.S. long-term securities. – Foreigners bought more than $19 billion in US long-term securities in May, including Treasuries and corporate bonds, after selling debt in April, the US Treasury Department said on Wednesday. Including short-term debt and banking inflows overseas investors purchased $35.5 billion of US securities, of which $22.4 billion was acquired by foreign official institutions.

David Fabian: – Why income investors should be watching high yield bond ETFs. – The Federal Reserve has mapped out its target for an October deadline to exit the quantitative easing measures that have helped stimulate the stock and bond markets for the last several years. The next step that economists are avidly trying to forecast is the timeline for additional fiscal tightening that could throw a wrench in the complacent market we have become accustomed to.

 

Bond Funds

Businessweek: – Gundlach’s Total Return loses analyst rating in dispute. – Jeffrey Gundlach’s Total Return Bond Fund at DoubleLine Capital LP has lost its analyst rating from Morningstar Inc. after a long-running dispute over the research firm’s coverage of the money manager.

Zacks: – 4 Overlooked ETFs with double-digit yield. – Though the broad U.S. equity markets have been hitting multiple highs, concerns have cropped up over its continued bullish run in the second half of the year. This is primarily due to expensive stock valuations, uneven global economic recovery, geopolitical tensions in Ukraine and Iraq,  and new threats from Portugal’s banking sector that are looming large across the globe.

 

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