PIMCO Total Return Fund’s Positions….Bonds to Avoid….Muni Tax Confusion…and more!

Best of the Bond Market for October 9th, 2012

Investment News: Where the PIMCO Total Return fund is invested now - Over the past 15 months, (Bill) Gross shifted the fund’s net exposure to U.S. government securities (including futures and other interest-rate derivatives) from approximately 0% as of June 30, 2011, to a peak of 41% on January 31, 2012, and back down to 21% at the end of August. During the latter half of 2011, he increased the fund’s stake in high-quality (mostly Fannie Mae) mortgage-backed securities from 21% to 50% of the fund and has maintained the allocation around this level throughout 2012.

Financial Lexicon: – Avoid these bonds and do this instead. – During this era of ultra-low interest rates, investors are faced with a difficult conundrum. When searching for yield among bonds, do you increase the duration and decrease the credit quality of your portfolio, or do you follow the advice so often given nowadays and focus your buying on corporate bonds with shorter terms to maturity?

BondBuyer: More confusion surrounding Obama/Romney tax plans and municipal bonds - Some market participants contend that Obama’s plans to raise tax rates and permanently reinstate the Build America Bond program would help the muni market, despite his plan to cap the value of tax-exemption at 28% for higher income earners.  They warn that Romney’s proposal to lower tax rates without adding to the federal deficit could be more of a threat.

MarketWatch: 5 ETFs for a bond bubble burst - ProShares Short 20+ Year Treasury ETF, iPath US Treasury 10 Yr Bear ETN, ProShares Short High-Yield ETF, ProShares UltraShort 20+ Year Treasury ETF , ProShares UltraShort 7-10 Year Treasury ETF .

Bloomberg:Investors show little worry over Gross’s “bonds could be burned to a crisp” comment – Investors keep pouring billions into U.S. bond funds while pulling out of equity funds, sacrificing a 115% rise in stocks from their lows for the perceived safety of bonds. Money managers such as PIMCO’s Bill Gross are warning that the flight to bonds leaves savers exposed to a new round of losses once interest rates rise, a risk many retail clients aren’t aware of.

NY Times: Regulators look to pull the muni market out of the Dark Ages.– The $4 trillion market in municipal bonds is stuck in the Dark Ages. In yet another attempt to pull the bond market into modern times, regulators put states, cities and municipal issuers on notice. No longer would they be allowed to stint on disclosing basic financial information — the kind that investors in, say, public corporations, have long relied on.

Bloomberg:Best bond firms split on year-end storm. – Debt strategists at top-ranked Wall Street firms can’t agree on what investors should do as yields on everything from government to corporate and asset-backed bonds plunge to record lows.

David Schawel:A look inside the Barclays Capital Bond Index - Bill Gross’s recent monthly commentary for PIMCO paints a disturbing picture for investors; his vision ends with stocks being “singed” and bonds being “burnt to a crisp.” But is he right?

Cate Long:Puerto Rico’s pain stretches to its lack of assets. – The recent LMM Airport bond sale is a terrible deal for the citizens of Puerto Rico, and it gives way too much benefit to the investor group. But Puerto Rico is running out of assets to monetize in order to pay down its debt.

Acting Man:Stocks, bonds and the economy. – What is the outlook for the current stock market rally and what lies in wait for the bond market?

Your Wealth Effect:How did bond funds react when interest rates were going up. – One of the main concerns I hear when I talk about bonds and bond funds is “what will happen to their prices when interest rates rise”? This chart from the St. Louis Federal Reserve, shows the month end year over year percentage change in both short term interest rates during the last ten years.

Roger Nusbaum:Was Wall Streets Bud Fox right all along? Barron’s recently had an article about the increasing popularity of emerging market debt. The article makes it seem like interest in this space is new but I seem to recall Bud Fox pitching the space to Gordon Gekko in the first “Wall Street” movie.

ETF Trends:PIMCO total return ETF hits $3 billion in assets. – PIMCO Total Return ETF (NYSEArca: BOND) has gathered $3 billion in assets in a little over seven months to become the most successful actively managed exchange traded fund launch ever.

Bloomberg: Rigged Libor Hits States-Localities With $6 Billion. – The Libor bid-rigging scandal is poised to more than double the losses suffered by U.S. states and localities that bought $500 billion in interest-rate swaps before the financial crisis.

Learn Bonds:Israel Bonds – Why I would gift them instead of US Saving Bonds. – There are very few bonds that can be bought in small amounts.  In fact, I know of only three bonds for purchase in the United States that are sold in increments under $100. They are the EE Savings Bonds, I Savings Bonds and eMitzvah bonds which are a type of Israel bond.  Saving bonds bond can bought in penny increments, starting at $25.00. eMitzvah bonds are sold in the following amounts $36, $54, $72 and $90 dollars. (Eighteen and multiples of it are lucky numbers in Judaism).

CityA.M:Fixed-income versus equity funds. – High quality bonds offer a reliable income and low volatility of returns – two important attributes for investors. But they are also priced expensively in this uncertain economic environment.

Morningstar:Financial corporate bonds outperforming industrials. – The average credit spread in the Morningstar Corporate Bond Index tightened 4 basis points last week to +150. Once again, the financial sector outperformed, tightening 5 basis points as compared with 2 basis points in the industrial sector.

InvestmentU:Take the money and run. – Free money! That’s the only way to describe what’s going on in the corporate bond market. Historic low interest rates have created an unprecedented opportunity for capital gains from what has traditionally been an interest-bearing investment only. Bonds have always been the perfect place if you’re looking for a more secure and predictable return than the stock market. The current interest rates make them a great place for unexpected capital gains, too. Take the money and run!

Investment Week:Why corporate bond liquidity will never recover to 2007 levels. – Liquidity in the corporate bond market will never recover to 2007 levels because investment banks are now so risk averse, according to Legg Mason global bond manager Ian Edmonds.

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