This Week’s Top Bond Market Stories – March 22nd Edition

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LearnBonds

LearnBonds: – With Safeway going private, should you own the bonds? – The recent news of Cerberus’ offer to purchase Safeway for roughly $9 billion brought with it varying reactions among Safeway’s bond investors. One question bond investors may be asking themselves is: should I buy those high-yielding Safeway bonds?  Here’s some food for thought.

LearnBonds: – Hiring data – Moderately encouraging. – Last month’s hiring data appear to indicate that the economy is at least chugging along. However, we have been wary of exogenous events, some we saw coming and some, which have come as surprises. Russia’s incursion into Crimea was an unforeseen exogenous event. We did not see it coming, few did. However, China’s problems were there for all to see. The problem was; few wanted to look.

LearnBonds: – The long and short of today’s bond market. – Bond investors are being told that there is tremendous risk in holding longer duration bonds. I have cautioned similarly in previous articles. And that might be true. Of course predicting the future path of interest rates might be akin to forecasting next week’s weather. We can see storms brewing in the distance, but generally can’t tell how much rain or snow will fall until the storm is much closer, and even then we are rarely perfect.

LearnBonds: – Predicting the future. The Fed. – We are entering a new world where interest rates will not be so predictable. This is just something that all participants in the bond and money markets are going to have to accommodate.

 

Municipal Bonds

Market Realist: – How will a Puerto Rican default affect the municipal bond market? – Puerto Rico’s $70 billion in public debt, which was recently downgraded to junk level by S&P, is soon going to come down heavily on the $3.7 trillion U.S. municipal bond market.

New York Times: – Determining the markup on municipal bonds. – The price you pay for the bond, including the markup, has a direct impact on the return you’ll earn as the owner of the bond. While markups are common, it isn’t always clear how much they tend to be.

Muniland: – The winnowing of retiree healthcare costs. – Many state and local governments have promised to provide healthcare benefits for their retirees. Few governments have set aside funds to pay for these promises, leaving an enormous unfunded liability that will burden future municipal budgets. Every government is responsible to meet their promises.

Fort Pitt Capital: – Municipal bonds: Returns, defaults & rates. – While the overall bond market faced challenges last year amid a rising interest rate environment, high grade municipal bonds are forecasted to perform better in 2014.

Morningstar: – Philadelphia budget surplus drop concerns Morningstar. – Philadelphia Mayor Michael Nutter’s proposal to reduce the city’s annual budget surplus by more than 50 percent in a year “is a concern,” Morningstar Inc. said in a report.

Bloomberg: – Rockland to Rochester win as N.Y. expands oversight. – From Rockland, New York’s lowest-rated county, to Rochester, its third-largest city, localities in the Empire State are winning with investors as the state expands oversight of municipal finances.

Bloomberg: – Jacksonville task force backs higher taxes to curb pension costs. – A civic task force recommends that Jacksonville raise taxes to meet soaring retirement costs that have left a pension fund in Florida’s most populous city with 39 percent of what it needs to cover promised benefits.

Bond Buyer: – California GOs different – and stronger – than Detroit’s. – LOS ANGELES – It’s a long way from Detroit to California. While the substantial haircut bankrupt Detroit wants to give its general obligation bondholders has caused municipal bond market ripples, the GO pledge should stay strong among California’s municipalities, market experts say.

 

Treasury Bonds

WSJ: – Treasury bonds rise for fifth session. – Treasury bonds gained for a fifth straight session on Friday on worries about geopolitical tensions arising from the crisis in Ukraine.

Bloomberg: – Treasuries hold two-day drop before Fed meets on taper, guidance. – Treasury 10-year notes held two days of declines before the Federal Reserve begins a meeting at which analysts forecast policy makers will decide to further scale back purchases of government bonds.

Market Realist: – Investors are interested in the long end of the Treasury curve. – Many investors fled from riskier assets, including high yield bonds and emerging market stocks on the face of prevailing tensions in Ukraine, resulting in movements towards safer long-term government bonds.

Market Realist: – Do mortgage rates follow movements in Treasury yields? – We are entering a new world where interest rates will not be so predictable. This is just something that all participants in the bond and money markets are going to have to accommodate.

 

Investment Grade Bonds

WSJ: – Fresh corporate debt sparks a feeding frenzy. – Mutual funds and other investors burned by the bond-market selloff last spring are scrambling for freshly issued corporate debt like never before, lured by how much easier it is to sell than older debt even when the markets are panicky.

WSJ: – Verizon prices $8.2 billion in debt. – Verizon announced the pricing of $8.2 billion in debt that comes due between 2016 and 2018. The offer represents the telecommunications company’s largest U.S. debt sale since its $49 billion bond deal in September.

Donald van Deventer: – The Coca-Cola company: A bond market view. – Bond investors have bid up the bonds of the company, but the best estimates of default probabilities (where love is irrelevant) for the company are just average.

Market Realist: – Why the investment-grade bond market declined last week. – After weeks of good earnings releases that largely supported the U.S. equity market and the investment-grade corporate bond market, last week’s activity recoiled dramatically. Despite lower borrowing costs and yields, the primary corporate bond (LQD) market remained dull.

Market Realist: – Why the investment-grade bond market declined last week. – After weeks of good earnings releases that largely supported the U.S. equity market and the investment-grade corporate bond market, last week’s activity recoiled dramatically. Despite lower borrowing costs and yields, the primary corporate bond (LQD) market remained dull.

Market Realist: – Why the investment-grade bond market declined last week. – After weeks of good earnings releases that largely supported the U.S. equity market and the investment-grade corporate bond market, last week’s activity recoiled dramatically. Despite lower borrowing costs and yields, the primary corporate bond (LQD) market remained dull.

 

Junk Bonds

Wall Street Playbook: – Retail investors can profit from high-yield debt offerings. – Can the average investor level the playing field by focusing more on the bond market?

CNBC: – Are junk bonds losing their ‘high-yield’ status? – Yield chasers have made high-yield debt one of the most popular asset classes this year, pushing returns to near record lows, and some analysts are concerned the segment is becoming too risky.

FT: – European corporate default rates fall. – The rate at which European companies default on their debt is forecast by Standard & Poor’s to fall further, because of improving economic growth.

FMD Capital: – Investors should avoid adding new money to junk bond ETFs. – High yield bonds, otherwise known as junk bonds, have been an excellent source of capital appreciation and income for several years now.  They have benefited from the Fed’s ultra-low interest rate mandate, which has forced income seeking investors to broaden their horizons for risk assets.  This in turn has prompted billions of dollars to flow into below investment grade credit quality holdings at a tremendous pace.

Businessweek: – Marathon Asset hates high yield. – Marathon Asset Management LP, a hedge-fund operator that manages about $10.5 billion, is betting prices will fall in the high-yield, high-risk bond market because interest rates and defaults probably will rise.

Market Realist: – An update for high yield bondholders: Why the market fell last week. – The first possible reason—interest rate drives the bond market. When the market interest rates rise, new issuance offered in the market provides higher returns compared to the existing bonds. This means that the older bonds are worth less, and their market price falls.

 

Investment Strategy

CNBC: – Are bonds still a safe bet? It depends. – The recent financial crisis that brought capitalism to its knees has ushered in an extended period of historically low interest rates as the U.S. Federal Reserve Bank (the Fed) implemented policies that saved the economy but may have created an unsafe environment for bonds. The question is, are bonds still a safe bet?

About.com: – The danger of shifting your longer-term allocation for the wrong reason. – Individual investors are generally regarded as being terrible at making decisions with their money, buying at the highs and selling at the lows. So what’s the solution?

A Wealth of Common Sense: – Why bonds belong in a diversified portfolio. – Following the 2007-09 financial crisis, many investors decided they needed insurance on their portfolio to protect against the possibility of another “black swan” event. It’s hard to believe that this was ever the case considering where the markets stand at the moment, but investors tend to have a very short memory.

Pensions and Investments: – Mapping a changed fixed-income world. – David Scott makes the case for an unconstrained multi-sector approach.

The Guardian: – Bond market crash? Pffffft. – The next crisis is supposed to be in bonds, but there are plenty of ways they can protect your money and make more of it.

 

Emerging Markets

Euroclear: – Emerging market bond issuers should thank the Fed, says ECB research. – Bond issuance in emerging markets over the last five years would have been half its actual size were it not for the US Fed’s quantitative easing programme, according to a study carried out by the European Central Bank.

FT: – EM central banks sell U.S. government bonds. – Central banks and hedge funds were large sellers of US Treasury debt at the start of the year, according to the latest official data released on Tuesday, as stress among emerging market countries intensified.

Income Investing: – For junk bonds, rate risk threatens, emerging markets beckon. – The junk-bond market has slowed a bit in the past few weeks, although it’s still returned 2.5% already this year. The so-called “high yield” market’s average yield is now down to a pretty meager 5.37%, and such low starting yields expose junk bonds to heightened levels of risk if interest rates rise, which isn’t typically a great concern for junk-bond investors.

The Asset: – Asia’s bond markets must be ready to face the rising risk of contagion. – Emerging East Asia’s local currency bond markets have weathered the recent market volatility well but risks to the markets are ticking up and countries need to be prepared, warns the Asian Development Bank’s (ADB) latest Asia Bond Monitor.

abc News: – Emerging-market bonds on sale but not on clearance. – For all the worries about how the Federal Reserve’s cutback in bond purchases would hurt the market, the biggest pain is being felt far away. It’s in Indonesia, India and other developing economies.

 

Catastrophe Bonds

Artemis: – East Lane Re VI cat bond upsizes to $270m for Chubb, prices at low-end. – Catastrophe bond, sponsored by U.S. primary insurance group Chubb, has now completed at the increased size of $270m with pricing at the low-end of the previously reduced range.

 

 

Bond Funds

MarketWatch: – Taking another look at stocks, bonds, gold and grains. – There’s a lot going on these days. Crimea, a region of Ukraine, will hold a referendum this weekend on whether or not to join Russia. A secondary concern is bad data from China. Gold is rocketing, stocks are swooning and bonds are rising on jitters. But let’s take a deep and breath and take another look at all that’s going on.

WSJ: – PIMCO Total Return peers also suffered outflows. – If misery loves company, Pimco Total Return Fund can find some solace in the money that’s been pulled out of some its competitors.

Focus on Funds: – ETFs: Silly and toxic, homework-requiring or brilliant? – Here’s a reason to sleep soundly if, like most investors, you choose to ignore new exchange-traded funds: One of the industry’s leading experts considers a quarter of them to be “toxic and silly.” Another half of launches require serious research to understand.

WSJ: – Options show more bullish bets on bond ETFs as rate fears ease. – With Ukraine in turmoil and China showing signs of a potential slowdown, the options market is showing a renewed bullishness for U.S. Treasury bonds.

FT: – Further tensions revealed at top of PIMCO. – One of three men lined up to be deputy to Bill Gross, the chief investment officer of Pimco, quit on the day his appointment was due to be announced after becoming disillusioned with the famed investor’s stewardship of the bond fund management group.

David Fabian: – Bond ETFs get tapered by Fed minutes. – The release of the monthly Federal Reserve meeting minutes threw bond ETFs for a loop on Wednesday as investors digested the news.

Bloomberg: – PIMCO replaced by TCW as manager of $1.3 billion fund. – Pacific Investment Management Co. was replaced by TCW Group Inc. as the manager of a $1.3 billion bond fund offered by Columbia Management Investment Advisers LLC, as the world’s biggest bond firm reorganizes management and faces client redemptions.

 

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