Vanguard to High Yield Investors: Go Away

Best of the Bond Market for May 24th, 2012

High Yield Boom:  Vanguard Curbs New Inflows Into $17B Fund - “The flows into the High-Yield Corporate Fund have been particularly acute (over $2 Billion in last 6 months), so we are taking these proactive steps to preserve the ability of the advisor to manage the fund effectively and protect the interests of existing shareholders.”

The Reformed Broker: The Junk Bond Orgy - The last time this went on was 2002-2003 when pension fund managers were prodded out on the risk curve and out on the yield curve by Greenspan.  So they bought mortgage bonds in trillion dollar increments, fortunately they were all AAA-rated so it didn’t turn into a debacle or anything.  Oh wait.

Bloomberg: NJ Governor Christie Deflects Revenue Shortfall Criticism by Calling Forecaster NamesAs New Jersey’s nonpartisan budget analyst testified before Assembly lawmakers about a $1.3 billion revenue shortfall, Republican Governor Chris Christie offered his own analysis of the speaker. “Why would anyone with a functioning brain believe this guy?” He’s “a joke,” a “handmaiden” for Democrats who control the Senate and the Assembly, Christie said. “The Dr. Kevorkian of the numbers.”

Bloomberg TV: Blackrock’s Fixed Income Chief Gives his Thoughts   - Summary of this thoughts: Low interest rates are going to be here for a while.  Prospect however is for rates to be higher in the next 6 to 12 months however.  He does not think Greece is going to Exit the Euro Zone.  Best opportunities are in some of the riskier areas high yield, floating rate exposure, and investment grade financials.

WSJ: Bond Funds Work on Greek Exit ScenariosSome portfolio managers are dumping debt of southern European countries, while others are piling into safer U.S. and German issues. Still others are “short-selling” Greek bonds in a bet they will lose value.

Shmulik Karpf: The Great Anomaly of the Corporate Bond Market - The companies who just raised money on the cheap do not rush to invest in the business or in potential M&A takeovers, they simply pay it out as dividends or they buy back stock. In other words, they believe that money is so cheap and their stock is so undervalued that the interest of shareholders is best served when the company buys its own stock on the cheap.

Mark Perry: BPP@MIT Annual Inflation Rate Falls Below 2% (h/t @abnormalreturns) – According to this real-time measure of major inflation trends in the U.S., inflationary pressures have been subsiding since last summer, and the annualized inflation rate fell below 2% at the end of April for the first time since early January 2010, more than two years ago.   

Governing.com: The Latest Wrinkles in the Municipal Bond Market - Some would-be issuers are making an end run around the muni market and borrowing directly from banks. Almost everyone in the municipal finance world has anecdotal evidence that suggests this is a fast-growing trend, but no one seems to have any exact data.  

BusinessWeek: Underwriters Paying to Pass Bond Issues Face ScrutinySoon after investment bank Morgan Keegan Inc. gave $1,000 to a committee backing voter passage of a bond authorization for Rogers, Arkansas, in September, the bank earned $502,000 selling the approved debt. “If you contribute, you get selected,” said Christopher “Kit” Taylor, a former executive director of the Alexandria, Virginia-based Municipal Securities Rulemaking Board.

MuniNet Guide: The Financial Future of Detroit: Is the Motor City in Drive, Neutral or Reverse?The unemployment rate for the Detroit area in March 2012 was 9.4 percent, down 2.3 percentage points from a year earlier…This data also points to a 1.1 percent increase in employment (number of employed persons) over the past three months.

Bloomberg: Firefighter earns $196,000 a year from pension as City Flirts with Bankruptcy - The result of yearly 6 percent cost-of-living increases the city once bestowed on firefighters and police.  “No one ever did the math on this,” Paul Doughty, head of the firefighters union, said in an interview in his office above the bar at the Firefighters Memorial Hall in Providence. “I don’t think anyone had any idea that if Gillie lived to 100, he’d be making $700,000.”

Bond Buyer: Alabama Raises a Question: When Is a GO Not a GO? – This is a great article on why not all GO bonds are created equal from the standpoint of what is backing them. Schaefer pointed to the Municipal Securities Rulemaking Board for industry definitions. A GO bond is secured by the full faith, credit and taxing power of an issuer.  The ad valorem taxing power can be unlimited or limited. Limited GOs are secured by a pledge of ad valorem tax that has a set rate or amount. There are also full-faith-and-credit bonds backed by all legally available funds of the issuer’s general fund, but not necessarily backed by ad valorem taxes.

Bond Squawk: How Including Bonds in your portfolio can improve returns – The best part of the article is where they go into the basics of choosing bonds for your portfolio. Investing in bonds requires a 3-step process: 1. Macro Analysis 2. Company Analysis, 3. Bond Selection.  They then go on to talking about choosing maturities.

Bond Buyer: Market Update – Muni’s Take an Early Holiday - Tax-exempt yields have yet to be updated from the morning’s Municipal Market Data scale read, when they were steady across the curve. The two-year, 10-year and the 30-year triple-A yields each closed Wednesday’s session flat, at 0.33%, 1.83% and 3.14%, respectively.

WSJ: Credit Markets: Possible Greece Euro Zone Exit Captivates Markets - Treasury prices soared Wednesday in the wake of renewed fears about Greece’s potential exit from the euro zone, helping the U.S. sell five-year notes at a record-low cost (0.748%).  By late afternoon, benchmark 10-year notes gained 15/32 in price to yield 1.741%. The 30-year bond rose 1 13/32 to yield 2.824%.


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