This Week’s Top Bond Market Stories – February 8th Edition

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LearnBonds

LearnBonds: – Emerging markets: Separating the opportunity from the danger. – When considering investing in emerging markets, we would prefer economies which are not running large current account deficits, are known for upholding rule of law and are well managed. But which economies are these? Read this to find out.

LearnBonds: – What’s going on with the 10-year Treasury? – One of the more crowded trades over the past twelve months has been a short (bet against) of treasuries. Popular consensus has been that the economy is in the process of bottoming out and that the Fed will ultimately bring QE to an end, ushering in a higher interest rate environment. But thats not how its played out.

LearnBonds: – Expect continued uncertainty and volatility in 2014. – If the rest of 2014 is like the first 37 days or so, the word that will be used to describe the financial markets will be “volatile.” The disruptions coming this past two weeks centering especially in the currencies of several emerging countries is just the latest upheaval to cause market to move in a direction opposite the one that was forecast a month or so ago.

LearnBonds: – Investing in Master Limited Partnerships. – Master Limited Partnerships, also referred to as MLPs, are potentially an excellent option for those investors who are focused on income. Learn more about them here.

LearnBonds: – Bonds: The best risk-reward when playing Best Buy. – The two safest ways to make money on Best Buy are to use short-term trades or to accept the currently-attractive yield on Best Buy’s 7-year debt. My take on the company is that Best Buy will be around seven years from now, but that there is far too much uncertainty to own a buy-and-hold position in the stock.  From a risk-reward perspective, I think it makes a lot of sense to simply buy Best Buy’s senior unsecured debt and hold it to maturity.

 

Municipal Bonds

MuniNetGuide: – Puerto Rico after the downgrade: What now? – The first shoe has dropped. Last night, Standard & Poor’s ended months of market speculation by finally downgrading the Commonwealth of Puerto Rico’s G.O. debt from BBB- to BB+, i.e. below investment-grade. The GDB’s rating was also cut to BB. Both ratings remain on Negative CreditWatch, signaling that further downgrades are possible. So what does this all mean for PR’s “market access,” going forward?

Forbes: – UBS drops first shoe on Puerto Rico bond investors. – UBS Puerto Rico bond investors better look out; the giant investment bank’s research analysts just dropped the first shoe on your heads. Last week, UBS issued a report stating that at least one of the Big 3 rating agencies, Moody’s, Fitch or Standard & Poor’s, will cut a swath of Puerto Rico’s debt to “junk” in the next month, according to Michelle Kaske of Bloomberg. The UBS report predicts that the other two agencies will soon follow.

SacBee: – Fixed income investors could benefit from muni bonds in rising rate environment, standish says. – Investments such as municipal bonds that have a yield advantage over Treasuries are likely to be among the fixed income segments that could provide outperformance in 2014 as U.S. Treasury yields start to move higher, according to the municipal bond outlook for 2014 from Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.

Washington Post: – Puerto Rico bonds downgraded to junk levels. – Credit-rating agency Standard & Poor’s downgraded Puerto Rico’s general-obligation bonds to junk levels Tuesday, making it even more difficult for the fiscally distressed island to borrow money and dig out from its severe fiscal problems.

WESA: – Pittsburgh’s municipal bond rating continues to improve. – A decade ago, the city of Pittsburgh’s municipal bonds were a risky investment. That’s a far cry from where the city is today, says Scott Kunka, director of finance for the city of Pittsburgh.

Reuters: – Redemptions force U.S. mutual funds to unload Puerto Rico debt. – U.S. mutual funds with heavy exposure to Puerto Rico bonds have sold off some of the cash-strapped island’s debt to meet investor redemption demands, taking heavy losses after a year-long slide in prices.

Credit Bubble: – Relative opportunity in muni bonds. – The investor base for munis is retail investors in high tax brackets, but many of them sold out last year because of Detroit and Puerto Rico headlines, and because the conventional wisdom is that interest rates can only go up. So yields went up and the closed end funds are trading at discounts to NAV.

FT: – Fed rule will hit spending on roads and schools, say U.S. cities. – U.S. cities and states are warning regulators that they will face budget crunches to pay for schools, roads and sewage systems if a proposed liquidity rule for banks is finalised.

 

Treasury Bonds

4Traders: – Treasury bonds attract buyers as data raise growth worries. – Investors flocked into U.S. Treasury bonds Monday as a pullback in key gauges of manufacturing in the world’s two largest economies raised concerns over the global growth outlook.

WSJ: – WisdomTree launches floating rate Treasury ETF. – WisdomTree, an exchange-traded fund (“ETF”) sponsor and asset manager, today announced the launch of the WisdomTree Bloomberg Floating Rate Treasury Fund (USFR) on the NYSE Arca. USFR seeks to provide exposure to floating rate notes issued by the United States Treasury. The Fund has a net expense ratio of 0.15%.

WSJ: – Longer Treasurys lead way. – Treasury bonds with longer maturities led a bond-market rally Monday following disappointing manufacturing data in the U.S. and China.

FT: – Banks urge U.S. Treasury to take bigger role in debt sales. – Wall Street banks are urging the US Treasury to play a more active role in how the country’s debt is sold, encroaching on the turf of the Federal Reserve Bank of New York.

WSJ: – Jeffrey Gundlach, Bill Gross reap windfalls from Treasury rally. – Some large U.S. bond funds reaped the windfall of a surprising turn in global financial markets since the start of the year as investments in Treasury bonds rallied and riskier bets went sour.

Bloomberg: – Treasuries decline for a third day as unemployment claims drop. – Treasuries fell, pushing 10-year note yields higher for a third day, as a report showed initial claims for unemployment benefits fell last week, reducing demand for U.S. government debt as a haven.

ETF Database: – First floating rate Treasury ETFs debut. – This year, for the first time in its history, the U.S. Treasury rolled out floating rate notes (FRNs), marking the first new class of issuance by the Treasury since it issued TIPS in 1997. On January 29, 2014, the U.S. Treasury completed its first floating rate auction, and now two issuers have debuted the first ever ETFs to offer exposure to the new notes.

 

Investment Grade Bonds

BusinessWeek: – Corporate default rate in U.S. lowest since March 2008. – The trailing 12-month U.S. speculative-grade corporate default rate fell to 1.7 percent last month, the lowest since March 2008, according to Standard & Poor’s.

WSJ: – Debt investors again head to safer shores. – Bond investors have been buying up ultrasafe debt and pulling back from higher-yielding bets in recent weeks, suggesting waning confidence that rates will rise and the Federal Reserve will continue to withdraw its bond-buying stimulus.

WSJ: – Debt investors again head to safer shores. – Bond investors have been buying up ultrasafe debt and pulling back from higher-yielding bets in recent weeks, suggesting waning confidence that rates will rise and the Federal Reserve will continue to withdraw its bond-buying stimulus.

WSJ: – Debt investors again head to safer shores. – Bond investors have been buying up ultrasafe debt and pulling back from higher-yielding bets in recent weeks, suggesting waning confidence that rates will rise and the Federal Reserve will continue to withdraw its bond-buying stimulus.

 

High-Yield

aiCIO: – When bonds are worth the risk. – Investors who took a punt on relatively risky fixed income over last five years would have notched up the best possible risk-adjusted returns for their portfolios, research has shown.

IFR Asia: – Issuers storm U.S. high-yield market with quick-print deals. – The US high-yield market roared back to life on Tuesday, with four new quick print deals from Netflix, AMC Entertainment, Regency Centers and Lennar Corp set to price and a jumbo deal for Chrysler pulled forward a day on the back of strong demand.

HighYieldBond.com: – High yield bond issuance totals $5.9B as market eyes stocks, Treasuries. – High-yield bond issuance in the U.S. totaled $5.9 billion last week, up from $4 billion the previous week. This activity brings year-to-date high-yield bond volume to $25.5 billion. That’s down from the $29 billion seen at this point in 2013, according to S&P Capital IQ/LCD.

About.com: – High yield bonds have made a 180-degree turn from 2013. What’s next? – High yield bonds were one of the few segments of the bond market to produce a gain in 2013, but the opposite has been true thus far in 2014. Through February 3, the iShares High Yield Corporate Bond ETF (HYG) had posted a year-to-date total return of just 0.10% – well below the 1.88% return generated by investment-grade bonds.

BusinessWeek: – Contagion rejected as biggest bond buyers double down on junk. – Michael Buchanan knew exactly what to do as markets were rocked in recent weeks on concern turmoil in developing nations from Argentina to China and Turkey would cause the global economic recovery to derail: buy junk bonds.

ETF Trends: – Junk bond ETFs gain traction despite risk-off environment. – Undaunted by the recent volatility in risky assets, some investors are turning to speculative debt and junk bond exchange traded funds as they buy on the short-term dips.

Economist: – A new world for bonds. – The idea of alternative weightings for indices has been around for a while in the equity market, and is known in the jargon as “smart beta”. It makes sense for such ideas to be extended to the bond market.

WSJ: – Private-equity firms tap fresh vein of cash. – Private-equity firms have found another way to extract money from their companies. Strong investor appetite for high-yielding bonds and initial public offerings has enabled private-equity-owned companies to issue a new type of debt that can be repaid early, and at a small premium, if the borrower goes public.

AllianceBernstein: – High yield: The perfect storm that wasn’t. – In a year when the US Federal Reserve caused jitters over quantitative easing, the US government endured a shutdown and investors shifted focus to equities, it’s no surprise that pure “duration-sensitive” bonds like US Treasuries had negative returns as interest rates spiked. But high yield emerged relatively unscathed, returning over 7% for the year.

 

Investment Strategy

Forbes: – How to invest in U.S. bonds. – U.S. bond investing has a reputation for being arcane, and understandably so. Where things get confusing for many investors is bond risk. While a U.S. bond is extremely likely to be repaid with the agreed interest, there is what’s known as “price risk,” that is, that the value of the bond itself could decline.

BusinessRecord: – High-yield short-term bonds. – To improve the survivability of your speculative bond portfolio, I suggest that you invest only in bonds that will come due in less than four years. Keeping short maturity dates is how many high-yield junk bond mutual funds have been able to post double-digit returns in the past couple of years.

David Fabian: – Fine-tuning your ETF income portfolio for 2014. – The whoosh that you just heard is the air being let out of stocks in January and a flight to quality in treasuries that has reasserted the need for a balanced income strategy. At the end of last year it seemed that the mainstream bias had convinced us that bonds were a death trap in the face of rising interest rates and stocks were the only place to be. Well that didn’t last long.

Cliff Smith: – Conservative bond strategy returning 12% annually and 3.5% maximum drawdown. – Cliff Smith shows the results of low duration MDAs applied to HYLD and show that a Compounded Annual Growth Rate.

 

Emerging Markets

BusinessWeek: – UBS CEO says emerging-markets sell-off overdone as investors exit. – The selloff in emerging-market assets that sent the benchmark equity index to the lowest valuation since the 2008 financial crisis may have gone too far, according to UBS AG Chief Executive Officer Sergio Ermotti.

FT: – Sovereign debt a better bet than equities, say fund managers. – In the view of many fund managers, better bargains are to be had in sovereign bonds than in equities, partly because debt markets tend to be dominated by institutions, which so far are displaying a more enduring faith than retail investors in the emerging markets theme.

Morningstar: – Advisers bullish on emerging markets. – Professional investors are set to up their clients’ exposure to emerging markets in the coming months – as fears surrounding slower growth and volatility subside.

Reuters: – Investors cling to frontiers as emerging markets sink. – As emerging markets tumbled this year, the riskiest country groupings on the fringes have been a haven. Small markets, local stories and in some cases pegged currencies backed by strong central bank reserves have shielded frontier markets from the worst of the emerging market rout.

Forbes: – Off-radar emerging markets worth owning. – Fund managers love emerging market debt for its yield. Where else can investors own a bond paying 10.5%?

Barron’s: – Emerging-market caution. – I spent the early part of my career investing in emerging stock, bond and currency markets. It was the 1990s, and at that time, those markets were truly emerging.

 

Catastrophe Bonds

Artemis: – Capital weighted cat bond spreads at issuance hit low in 2013. – The decline in catastrophe bond and insurance-linked security (ILS) spreads and premiums over the last year has been well document, with some tranches seeing 40% declines in pricing over comparable issuance a year earlier.

Artemis: – Capital weighted cat bond spreads at issuance hit low in 2013. – The decline in catastrophe bond and insurance-linked security (ILS) spreads and premiums over the last year has been well document, with some tranches seeing 40% declines in pricing over comparable issuance a year earlier.

 

Bond Funds

Bruce Vanderveen: – 3 Bond ETFs to beat deflation. – Deflation, it’s like the unkillable horror-movie monster. Time and again, just when you think it’s finally dead, it rears its ugly head to once again threaten global economies.

Reuters: – PIMCO Total Return fund starts year behind more than half its peers. – The Pimco Total Return Fund, the world’s largest bond fund, trailed more than half of its peers in January despite returning to gains after a rough 2013, preliminary Morningstar data showed on Monday.

ValueWalk: – Large cap value mutual funds love industrials. – Goldman Sachs analysts have released their Mutual Fundamentals report, breaking down a vast amount of data into 12 key points. Here is an excerpt with a specific focus on large cap value equity and bond mutual funds.

MoneyMarketing: – The lack of liquidity a concern in bond markets. – Liquidity may mean different things to different investors but we would define it as the ability to buy and sell bonds in decent amounts at a reasonable cost and in the desired timeframe.

YourMoney: – Is the bond fund exodus set to continue? – After a dismal 2013 for fixed income, will investors return to bond funds? We ask the experts for their views.

WSJ: – Investors bolt from stock funds into bonds. – Investors swapped out of U.S. equity funds and into bonds at the fastest clip on record last week, according to Lipper Inc., as they grasped for safety while the stock market swooned.

Business Insider: – Here’s why it’s a terrible idea to buy individual bonds over bonds funds. – Many investors think they will be protected in the event of interest-rate rises if they buy individual bonds (and hold them to maturity) over bond funds. But Sam Lee, a strategist and editor of Morningstar ETF Investor, thinks this is “absolutely false”.

 

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