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Municipal bond investors are sitting pretty after a robust first half of 2014. With the Barclays Municipal Bond Index climbing an impressive 6% over the first six months of this year. But with clouds continuing to form over Puerto Rico and the threat of rising Treasury yields, will municipal strength continue into the second half?
Anthony Valeri, fixed income strategist at LPL Financial, says municipal bonds benefited from the unexpected first-half drop in Treasury yields, but they’re going to be subject to the prevailing winds of the broader bond market in the second half, with most pundits expecting rates to rise.
Ultimately, we believe municipals will be more sensitive to the path of the taxable bond market after a strong first half. Valeri Said in his mid-year outlook. On a positive note, moderate valuations coupled with below average new issuance means that municipal bonds may be more insensitive to periods of weakness. We continue to believe the taxable bond market is likely the main catalyst to the next move in municipal bond prices — be it higher, lower, or sideways.
However, absent a new bout of economic weakness, we see additional municipal price gains as limited and the now lower level of yields implies less return and also reduced protection against rising interest rates. A combination of intermediate and longer-term municipals to help limit interest rate sensitivity is an option to invest in the more challenging environment we see over the remainder of 2014.
Valeri is the latest in a long list of analysts predicting bad things for the muni market in the latter half of this year, but so far munis have continued to hold steady without any major problems, despite the ever darkening storm clouds hanging over Puerto Rico.
Todays Other Top Stories
LearnBonds: – Are bonds riskier than stocks? – Investors are fearful that buying a bond today won’t be as lucrative as buying a bond a year from now. For these two reasons, many investors view bonds with much skepticism, as risky, or even as being in a “bubble.” I generally understand the skepticism – but bond risk can be mitigated by purchasing issues that minimize the potential forward pitfalls.
Cate Long: – Why it is so expensive to trade muni bonds? – Why is it so expensive to trade municipal bonds? We finally have some answers from a long awaited MSRB report on trading in the opaque muni bond market.
The Bond Buyer: – Investors pay more for munis than dealers, MSRB report shows. – Investors pay more for municipal securities than dealers, particularly when there is more time between trades, according to a long-awaited report commissioned by the Municipal Securities Rulemaking Board.
Bitvore: – Atlantic City declines: Will it end in a municipal bond default? – The popular HBO series Boardwalk Empire portrays Atlantic City in the midst of its Prohibition-era heyday when tourists, booze and money were flowing liberally. The upcoming season will portray the ravages of the Depression, but it may not mention the downturn’s impact on Atlantic City municipal bondholders.
Bloomberg: – Puerto Rico bonds rally most in five months after decline on law. – Bonds from Puerto Rico are rallying the most since February as investors bet prices fell too far after the three biggest rating companies cut the island’s credit deeper into junk this month.
Market Realist: – Why was indirect bidder demand for 30-year bonds higher? – Demand for the July 30-year bonds auction was in-line with averages seen in 2014. The bid-to-cover ratio for the July auction came in at 2.40x—down from 2.69x recorded in June’s auction. The offer amounts for both auctions were the same at $13 billion. The ratio has averaged ~2.40x in auctions held in 2014.
MarketWatch: – Treasurys may outshine stocks as Fed hikes rates. – CRT’s Ader: Treasurys could be ‘emergency exit’ as risk assets reverse.
WSJ: – U.S. Government bonds pull back. – Treasury bonds pulled back on Wednesday as demand for haven assets eased amid higher global stocks.
Global Finance: – U.S. government bonds have best week in four months. – U.S. government bonds strengthened Friday, capping the biggest weekly rally in price in four months.
Investment Grade Bonds
Donald van Deventer: – The Walt Disney Company bonds: Very low default risk at a ‘no brand’ price. – Most “brand name” company bonds we have reviewed to date do not offer “good value” as measured by the ratio of credit spread to default probability. The Walt Disney Company is an exception.
High Yield Bonds
Businessweek: – Wall Street wins (or doesn’t lose much) on junk trading. – A few things went right last month for Wall Street’s beleaguered bond dealers, helping to prop up otherwise sagging trading revenue. But that doesn’t mean they’ve reclaimed Masters of the Universe status just yet.
CNBC: – What Yellen said on junk bonds isn’t what the market heard. – Tech shares were met with a quick sell down on Tuesday after Federal Reserve Chief Janet Yellen said some valuations were “stretched,” but similar comments on high-yield bonds got a yawn.
Bloomberg: – American Energy bonds said to be sold as soon as tomorrow. – American Energy Partners LP, the oil-and-gas venture run by former Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon, provided yields at which underwriters may offer its planned $1.4 billion of debt, according to two people with knowledge of the matter.
Advisor.ca: – How to handle high-yield bonds. – Nicholas Leach, vice-president of global fixed income and high yield at CIBC Asset Management suggests investors may benefit from choosing high-yield over investment-grade bonds. That’s because “high-yield coupons [will likely] offset any rise in rates, and [they'll be] more than enough to offset default rates relative to [their] investment-grade counterparts.”
Emerging Market Bonds
CNBC: – Why the EM bond rally is different this time. – Shrinking spreads between emerging market bond yields and U.S. Treasurys’ may have spurred bubble fears, but some analysts don’t see any reason for alarm.
Real Estate Investment Trusts
Trustnet: – Are property funds really an alternative to bonds for income investors? – A growing number of investors are turning to direct commercial property funds as an alternative to traditional fixed income portfolios, but is the asset class a like-for-like replacement?
Motley Fool: – 1 reason New York mortgage trust is a better high-yield than annaly capital. – New York Mortgage Trust has done shareholders a great service by shifting a larger percentage of its capital into commercial mortgage-backed securities and distressed residential loans in 2012 and 2013. This ultimately allowed the company to emerge from the 2013 mortgage REIT meltdown pretty much unharmed.
The Economist: – The $15 trillion question. – Many retired people don’t have proper pensions any more. The financial-services industry may end up cashing in.
Preferred Stock Channel: – 25 S.A.F.E. dividend stocks. – 25 Top Ranked Stocks Increasing Dividends For Decades.
ETF.com: – A bond ETF for the world’s diverging monetary policies. – Throughout much of the developed world, investors have become accustomed to low interest rates, but rates in some markets will not stay depressed indefinitely. In fact, some developed economies have already boosted borrowing costs this year.
ETF.com: – Don’t assume U.S. bond ETFs are U.S. focused. – How much international exposure should you have in your portfolio? Most of the time the person who asks this question is referring to their stock allocation. But what about other parts of the allocation?
The Telegraph: – How a market shock could make your bond fund unsellable. – Several things could trigger a stampede of sellers among bond investors – and there may be no buyers, says Brian Dennehy.
ETF Trends: – Actively managed ETFs show continued growth. – While actively managed exchange traded funds still represent just a sliver of the broader exchange traded products industry, active offerings are on a positive growth trajectory.
WSJ: – BlackRock sees strong growth in bond shop. – The world’s largest asset manager is seeing strong growth and performance in its bond shop. But its U.S. actively managed equity business is still struggling to keep up, despite broad stock market gains.
Gross: PIMCO’s “New Normal” GDP forecast for 2014 2nd half is 3%. “New Neutral” policy rate target remains 2% nominal in 2017 and beyond.
— PIMCO (@PIMCO) July 16, 2014
BBB rated Hooters ABS deal w/ price talk around swaps +275bps to the 6yr
— David Schawel (@DavidSchawel) July 16, 2014
Larry Fink: ETFs are the new futures. Hedge funds switch to use ETFs for big long & short bets. Good for $BLK. Good for the fin system?
— Stephen Foley (@stephenfoley) July 16, 2014