Mortgage Bonds Approaching Tipping Point and Today’s Other Top Stories

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There are big changes afoot in the mortgage bond market, all of them centered around the Fed’s buying of Mortgage-backed debt as part of its quantitative easing program.

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But now the Fed is scaling back QE with Bloomberg reporting that Fed buying of these securities is poised to fall below growth in the $5.5 trillion government-backed market as soon as May.

This creates a new challenge for the housing market, with the pullback of the Fed threatening to inflate borrowing costs.

“We’re within a few months of needing private demand to offset supply,” said Brad Scott, Bank of America Corp.’s New York-based head trader for a type of government-backed mortgage bond known as pass-through securities. “The hawkish statement from the Fed occurred at a precarious time for the asset class from a medium-term supply and demand perspective.”

Even if not an immediate threat, the market is facing an end to longer-term demand fueled by the government, according to Robert Bayston, managing director at Bank of New York Mellon Corp.’s Standish unit. The Fed purchases followed a decade where prices were supported by Fannie Mae and Freddie Mac, which now are being forced to shrink their balance sheets, he said.

“The next several weeks probably won’t be a turning point but we are concerned over the next year or so,” said Bayston, who helps oversee about $160 billion of fixed-income assets. “Spreads are going to need to widen enough to attract capital that’s now being dedicated to other assets.”

 

Todays Other Top Stories

Municipal Bonds

Philly.com: – NJ housing agency defies Moody’s ‘junk’ rating. – Moody’s Investors Service has cut bond ratings on $53 million of New Jersey Housing and Mortgage Finance Agency bonds by one notch, to Ba1 — junk-bond status, off-limits for some insurance companies and other fastidious investors.

Bloomberg: – Scores of Puerto Rico trades sub-$100,000 voided by dealers. – Scores of trades in bonds Puerto Rico issued this month have been canceled by dealers, including some that were under the $100,000 minimum transaction level stipulated in deal documents, data compiled by Bloomberg show.

Bloomberg: – Puerto Rico to Detroit buoyed by insurance comeback. – Buyers of debt issued by bankrupt Detroit or junk-rated Puerto Rico are finding it pays to have bond insurance. The backing is even more valuable after upgrades of units of Assured Guaranty Ltd. and MBIA Inc.

CharlesSCHWAB: – Municipal bond insurance: What to consider before investing. – Two recent upgrades to the ratings of large municipal bond insurers highlight how much the landscape for insured municipal bonds has changed since the financial crisis of 2008. Since then, the number of municipal bond insurers has declined and their credit ratings have fallen. The share of the newly issued munis covered by bond insurance has also shrunk dramatically. That’s caused many municipal market participants to question the value of insurance.

Morningstar: – Municipal outlook: An appetite for risk amid low supply. – At a price, investors are still willing to take on municipal credit risk–even from some of the highest-profile and most fiscally distressed issuers.

Cate Long: – The risks of municipal default and bond insurance. – Events in the last seven years show anecdotal evidence for and against municipal bond insurance. The bankruptcies of Jefferson County and Detroit and the workout of Harrisburg, Pennsylvania demonstrate the value of a bond insurer that makes full interest and principal payments for defaulted bonds. Investors undoubtedly benefit from this continuity of payments.

Governing: – Bonds and the BFF problem. – A new rule tries to keep muni market players from getting too friendly. If you sell bonds, your real friends are those who work only for you. If you buy bonds, get ready to share friends-only information with the rest of the market. These changes are designed to focus accountability on buyers and sellers, and to keep friends, both well intentioned and otherwise, at arm’s length.

Businessweek: – Munis poised for best first quarter Since ’09 on issuance dearth. – The $3.7 trillion municipal market is off to its strongest start in five years as demand for tax-exempt debt rises and issuance falls to the least since 2011.

 

Treasury Bonds

Income Investing: – U.S. bonds extend gains; durable goods data raises questions. – Treasury prices climbed as economic data release today raised questions about the pace of economic growth.

WSJ: – U.S. Treasury prices gain on durable goods report. – U.S. Treasury bond prices rose broadly Wednesday as a mixed durable goods report eased worries that the Federal Reserve may raise interest rates sooner than many investors expect.

 

Corporate Bonds

Morningstar: – Credit market outlook: Bonds priced for the benign. – Corporate credit spreads are fairly valued–albeit at the tight end of the range that we view as fairly valued.

 

High Yield

Market Realist: – High-yield bonds and stocks’ performance over the past 3 years. – High-yield fixed income ETFs like JNK and HYG have provided total returns in excess of 25% over the past three years. While high-yield bond ETFs like HYG and JNK have performed well in the past three years, why has the short interest ratio for these ETFs suddenly risen to record highs?

 

Emerging Markets

iShares Blog: – Are emerging market bonds worth the risk? – As the deteriorating situation in Ukraine rattles global markets, Matt Tucker examines the fixed income side of the story, taking a closer look at the conflict’s impact on the overall bond market.

Citywire: – Time for beta gains is over, says PIMCO’s $85bn star. – PIMCO GIS Global Bond manager Scott Mather is eyeing opportunities in selective emerging market debt despite remaining in defensive mode overall.

 

Investment Strategy

LearnBonds: – Why everyone must own these 12 dividend paying stocks. – According to the classic advice given by financial planners, your retirement plan was supposed to  be a “three-legged stool,” consisting of a company pension , Social Security and personal savings.   It’s looking pretty clear to me you can’t count on anything better than a pogo stick, because two of the those three legs are gone or going. So how can you make up the difference.

ETF.com: – Rick Ferri: 3 Big questions to ask an advisor. – Investment advisers are everywhere. There are thousands of them. Finding one that’s right for you is a challenge. How do you find an adviser that fits your needs? I’ve read articles that provide 20 questions, 10 questions, etc. Here are my “3 Big Questions” to narrow the adviser universe down to a manageable list of potential candidates.

Zacks.com: – Profit from a flattening yield curve with this ETF. – The short end of the yield curve is rising faster than the long end. This trend is likely to continue in the coming months, suggesting investors might want to avoid riding the yield curve or take an inverse position. This could be easily done through the only option in the broad bond ETF space

 

Bond Funds

WSJ: – Long-term mutual fund inflows $3.43 billion in latest week, ICI says. – Long-term mutual funds reported estimated inflows of $3.43 billion in the latest week as investors added more money to bond and hybrid funds than they pulled from U.S. equities, according to the Investment Company Institute.

MarketWatch: – Legg Mason BW Alternative Credit Fund ranks first in Morningstar nontraditional bond funds category. – The Legg Mason BW Alternative Credit Fund has received number one absolute rankings within Morningstar’s nontraditional bond funds category for the one- and three-year periods ended February 28, 2014.

 

 

 

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