This Week’s Top Bond Market Stories – December 21st Edition

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Learn Bonds

LearnBonds: – Should an investor be buying Treasury Inflation Protected Securities (TIPS) at this time? – Well, TIPS were created for investors that wanted to protect themselves from price inflation. By creating an instrument that protected investors from price inflation, the US Treasury Department was attempting to create an instrument that yielded what can be called a “real” interest rate.

LearnBonds: – Intermediate-Term Bonds. – Rather than take on the low returns of a short-term bonds or the higher returns but higher risk associated with the maturation of long-term bonds, many investors prefer intermediate-term bonds.  One of the concerns some investors have with long-term bonds is the degree of interest rate risk over time.  Similarly, one of the drawbacks to short-term bonds is the low rate of return.  Because of the low rate of return, investors often see short-term bonds as an alternative to money-market funds.  The option of an intermediate-term bond allows for less interest rate risk than with a long-term bond, and offer a better rate than a short-term bond, while reaching maturity in between three and fifteen years.  When interest rates are uncertain, an intermediate-term bond can be a balanced solution for investors.

LearnBonds: – Be a year-end tax savvy bond investor. – December is typically the time of the year when the term “tax-loss selling” comes into play. If an investor has sold any asset, including stocks, bonds, real estate, or other tangible property for a gain during the course of any calendar year, from a tax management perspective, it serves as a benefit to offset those gains by selling assets currently priced lower than when purchased.

LearnBonds: – 3Twelve Total World Bond™ – A map of all major bond categories in the world. –  The 3Twelve Total World Bond™ map may be the most complete compilation of world bond totals available. We are delighted to publish this exclusively with LearnBonds — the most comprehensive source for fixed-income.

LearnBonds: – Toll Brothers’ newly issued bonds are worth a look. – In November, Toll Brothers, through Toll Brothers Finance Corp. issued $250 million of 5.625% coupon senior unsecured notes.  Despite trading a bit over par, the notes still offer an attractive yield for the given level of credit risk.

 

Municipal Bonds

Bernardi Securities: – Will Detroit turn the municipal bond market upside down? – Will the Detroit Chapter 9 bankruptcy turn the municipal bond world upside down? A random vacation photo captured this concern fairly well. With such a big question looming over the market, let’s review the ways in which the largest municipal bankruptcy in our nation’s history may set precedents for municipalities across the country.

Cleveland.com: – Bedford Law Director Ken Schuman and Municipal Court Judge Harry J. Jacob III indicted. – A grand jury today indicted Bedford Law Director Ken Schuman and Municipal Court Judge Harry J. Jacob III as part of a 19-count indictment that alleges that the public officials accepted bribes and solicited prostitutes, among other crimes.

George Spritzer: – Year-end opportunity in busted muni CEF IPOs? – The time may have come for one of the best trading opportunities of the year- the January effect, where you buy stocks in the last few weeks of the year that are artificially depressed by investors selling them for tax reasons. These stocks often experience a nice bounce in January when the selling pressure eases up.

Schroders: – 2014 Outlook: U.S. municipal bonds. – As we look forward into the year, the primary drivers for returns in the municipal market will be rising rates and spread compression, particularly in the intermediate to long end of the curve.   Negative returns due to rising rates will be somewhat mitigated by spread compression and positive carry.

Bloomberg: – Princeton university to tap muni market in $200 million sale. – Princeton University, one of the world’s wealthiest schools, plans to borrow $200 million through the municipal market in January.

ValueWalk: – Muni bonds yields drop despite heavy issuances, doubled outflows. – Muni bonds ought to have had a rough week, with outflows more than doubling from $875 million to $1.9 billion and more than $11 billion in new issuing, but a Volcker Rule exception and a few other positive trends actually caused them to recover.

Income Investing: – Muni-fund outflows spur bond buys. – Tax-loss selling has added to the exodus from municipal-bond mutual funds that’s been a “Groundhog Day” theme around here this year, according to Chris Mauro, RBC Capital Markets’ head of U.S. Municipals Strategy group. “While 2013’s interest rate and credit shocks were the principal drivers behind the outflows early on, we believe that year-end tax-loss selling has meaningfully influenced outflows in recent weeks,” he writes in a recent note Tuesday.

Douglas Albo: – CEF Strategies: The sad state of municipal bond CEFs. – No CEF sector has contributed more to the fallout in CEF valuations this year than the municipal bond sector. If you want to be reminded of what it’s like to live 2008 all over again, just look at what has happened to municipal bond CEFs in 2013. Though it’s been a tough year for most all fixed-income investments, it gets magnified in CEFs because of their use of leverage as well as the panicky nature of individual investors in these funds.

WSJ: – Volcker rule shows its wide reach. – Unforeseen consequences of the Volcker rule already are rippling into the furthest corners of the economy and financial markets. Financial institutions and investors are scrambling to line up a new way to finance Municipal-bond investments, with the week-old rule set to curtail banks’ dealings in so-called tender-option bonds—a $75 billion niche of the market for debt issued by cities, states and local governments.

The Street: – Muni investors rush for exits. –  Municipal bond funds saw $1.9 billion in outflows this week as investors continue to back away from the market.

Yahoo Finance: – Little respite seen for U.S. municipal bonds in 2014. – The withering U.S. municipal bond market will shrink even more well into 2014, with interest rate and credit risks keeping both investors and borrowers away.

 

Treasury Bonds

BusinessWeek: – Treasury curve flattens as traders unwind wrong-way taper wagers. – The yield gap between Treasury five-and 30-year securities narrowed for a third day as traders unwound wrong-way bets that the Federal Reserve would wait to announce a reduction of debt purchases until after the new year.

Bloomberg: –  Treasury 10-year yields climb to 3-month high on taper prospects. – Treasury notes dropped for a second day, pushing 10-year note yields to a three-month high, on bets the Fed will conclude its bond-buying program by end of next year as it steadily reduces purchases amid economic improvement.

The Economist: –  The bond bears. – If there is a consensus bet for 2014, it is that equities will continue to outperform government bonds, as they did in 2013. But the odd thing is that, if investors relied on the usual fundamental factors, the evidence would seem to point in the opposite direction.

ETF Trends: – Low inflationary pressures left TIPS ETFs feeling the pinch. – Treasury Inflation Protected Securities exchange traded funds have underperformed traditional Treasuries, with TIPS set to see their worst annual decline since they first began trading, as inflation failed to rear its ugly head.

WSJ: – China adds to U.S. Treasury holdings. – China scooped up more U.S. Treasury debt in October than any other foreign investor, a sign that the government shutdown and threat of default that month didn’t diminish the market’s status as a global haven. China boosted its holdings by $10.7 billion in October to $1.3045 trillion, according to the latest monthly data released by the Treasury Department on Monday.

Bloomberg: – TIPS wipeout signals Fed losing fight against disinflation. – Bond investors are signaling they expect the Federal Reserve to lose its battle against disinflation, even after inundating the U.S. economy with more than $3 trillion in the past five years.

BRecorder: – Nasdaq plans ‘dark pool’ for U.S. Treasuries by John McCrank. – Nasdaq OMX Group plans to create a so-called dark pool for electronic US Treasuries trading where buying and selling interest is not revealed, even on a post-trade basis, the company’s chief executive officer said recently. Nasdaq, which runs the No 2 US equities exchange, closed its $750 million acquisition of eSpeed, an electronic Treasuries-trading platform formerly run by BGC Partners Inc, in July.

 

Investment Grade Bonds

TheStreet: – Investing in corporate bonds for income. – The U.S. stock market has had a great run this year with the Standard & Poor’s 500 Index (SPX)and Dow Jones Industrial Average (DJIA) up about 27% and 24%, respectively. Less noticed has been the white-hot corporate bond market.

BusinessWeek: – Relative yields in U.S. fall to six-year low; Credit swaps hold. – Relative yields on U.S. corporate debt fell to the lowest in six years as investors scoop up riskier assets. A gauge of credit risk held little changed.

Bloomberg: – Bond trade cheapest since ’07 hits record amount. – Investors are paying the least in six years to trade U.S. corporate bonds as they transact more frequently than ever, adapting to a Wall Street where dealers commit less money to facilitate buying and selling.

 

High-Yield

FT: – High-yield bonds benefit from market rotation. – Anyone looking at the stunning rise in U.S. equities and losses in bonds this year would conclude that a ‘great rotation’ between the asset classes has defined 2013.

Before its News: – Junk bond ETF lagging S&P 500 by 15% since May…Next move is? – When it comes to “what have you done for me lately” Junk bond ETF JNK doesn’t have much to brag about! Since early May, JNK is lagging SPY by almost 15%. I look at the S&P 500 as the general and junk bonds as the troops and you want the “troops to follow the general!” From a pattern perspective, it would appear very important that JNK NOT break support line (2) or further selling and weakness could creep into this lagging asset!

MarketWatch: – Babson Capital global short duration high yield fund. – Babson Capital Global Short Duration High Yield Fund (the “Fund”) BGH -0.77% announced a special dividend of $0.3105 per share payable on January 2, 2014. The Fund anticipates that this distribution will be paid from short-term and long-term capital gains. This distribution is in addition to the Fund’s regular dividend of $0.1677 per share, which is payable on January 2, 2014.

FT: – Global high-yield corporate debt booms. – Investors’ hunger for yield in a low interest rate environment has led to the best year for global high-yield corporate debt on record, according to Thomson Reuters. It has reached $473bn this year, already up 18 per cent over last year’s total.

 

Emerging Markets

Financial Post: – Fed tapering less rosy for emerging markets. – Two days of trading hardly says much about the longer-term implications of the U.S Federal Reserve’s decision to reduce its bond-buying program, but equity markets are taking it well in stride so far — at least in the developed world.

WSJ: – Advisers hold emerging-markets bonds for long haul. – Emerging-markets bond funds have suffered outflows of late, but some financial advisers say they’re as enthusiastic as ever over the bonds’ long-term prospects. “With interest rates going up, the domestic bond market is going to suffer,” says Avani Ramnani, director of financial planning and investment management at Francis Financial in New York. “Yields are going to increase.

Forbes: – 2014 High yield bond investment outlook. – Returns and issuance of high-yield corporate bonds in 2014 are expected to fall short of this year’s stellar performance, investors and strategists say. They predict that continued market strength will open the door to more issuer-friendly terms, while the impact and timing of the Federal Reserve’s stimulus-tapering plans will be a wildcard. Worries about Europe’s credit woes and the dysfunctional U.S. government, meanwhile, have receded for the time being.

Reuters: – Emerging market debt trading volumes drop 20 pct in 3rd quarter. – Trading volumes of emerging market debt dropped in the third quarter to $1.266 trillion, a 20 percent decline from the prior quarter as issuers pulled back from selling bonds while uncertainty over U.S. monetary policy increased.

FT: – Edmonds sticks with EM debt in spite of poor year. – Ian Edmonds has overhauled the emerging market debt portion of his Legg Mason Global Multi Strategy Bond fund after the position dragged on performance this year.

Emerging Markets Daily: – Why invest in EM bond closed-end funds? – Why do we want to know about closed-end funds when there are plenty of options in ETFs and open-end mutual funds? Closed-end funds are less liquid. During times of market distress – which we expect as the Fed taper looms – share price of those funds can diverge from the net asset values (NAV), giving us an opportunity to bottom fish.

Morningstar: – For emerging-markets bond exposure, these funds are tops. – Don’t look abroad for fixed-income exposure without first considering these analyst-recommended offerings.

ETF Trends: – Emerging markets bond ETFs look to a better 2014. – Among emerging markets bond exchange traded funds, a once hot corner of the ETF universe, 2013 will go down as a year to forget. That sentiment applies to both dollar-denominated and local currency funds.

 

Bond Funds

Morningstar: – Stop scrounging for income and sell some stocks. – You’re retired, and you have two choices to generate the money you need for living expenses. The first entails taking more risk, and the second actually reduces risk in your portfolio.

Focus on Funds: – Bond-fund outflows surged to 24-week high ahead of ‘taper’. – Judging by money flows, bond-fund investors weren’t taking chances ahead of the Federal Reserve’s decision to dial back monthly asset purchases. Redemptions from bond funds tracked by data firm EPFR surged to a 24-week high in the week that included the Dec. 18 news that the Fed will “taper” $10 billion in monthly asset purchases.

MarketWatch: – Resolve to raise income through bond funds. – Since the first hint that the Federal Reserve would begin tapering its monthly bond-buying program and long-term interest rates began to rise last May, investors have shunned all types of bonds and bond funds. Nowhere is the negative sentiment more evident than among closed-end bond funds. However, several factors have recently combined that may help these funds fulfill investors’ New Year’s resolutions to earn more income.

Philliy.com: – Your Money: What Fed’s bond-buying move means to an investor. – Now that the Federal Reserve has decided to cut back its bond-buying by $10 billion a month, the move could torpedo the bond market. What’s an investor to do?

VC Post: – Alternative bond funds a rave in U.S. investors – report. – A report published on The Financial Times said the flow of money poured into a new bond fund class was seen increasing this year despite retail investors’ concern over the possibility of interest rates rising. These bond funds were said to give managers unprecedented authority regarding its trading strategies, the report said.

Matt Tucker: – What did 2013 mean for fixed income markets? – As we approach the end of the year, it’s scorecard time once again – time to see how our predictions and projections for 2013 worked out. In my first blog post of the year, I explained what I thought the macro environment would look like and identified three strategies that I thought investors should consider as a result.

ETF Trends: – Rising rates and soaring stocks: Time for convertible bond ETFs. – The market has seen a sudden surge in convertible bond investing owing to the growing concerns of rising rates that hit the conventional debt markets. Meanwhile, stock markets set new highs last month and with decent economic fundamentals, this type of bond is back in the limelight.

Bloomberg: – Goldman Sachs wins bond investors to flexible mutual fund. – Goldman Sachs Group Inc. (GS) is drawing record deposits into a bond mutual fund that’s making money even as interest rates rise, giving the bank a boost in one of the few Wall Street businesses it hasn’t dominated.

The BIG Picture: – Crowding in – Bond interest rates. – We are watching bond market volatility as Treasury bonds struggle with questions about what the Fed (Federal Reserve) is going to do. Only the passage of time and improvement of communication from the new Fed leadership will resolve this issue of inadequate clarity and resulting volatility.

Philly.com: – Great expectations for an investment rotation. – ETF Trends: – Some new ETFs are off to fast starts. – Roughly 140 exchange traded funds and exchange traded notes (ETNs) have come to market this year. As is the case with any year’s crop of new ETFs, some are off to faster starts than others.

 

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