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This Week’s Top Bond Market Stories – May 10th Edition

Adam Green

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LearnBonds

LearnBonds: – 20% of families don’t have even one employed person. – Officially, the percent of families with an unemployed person was 9.6% at the end of 2013. This compares to a recent 6.3% official unemployment rate for nonfarm payrolls.  What I find most curious, however, is what I will call the unofficial-but-not-to-be-ignored unemployment rate among families.

LearnBonds: – Full-time business and part-time jobs. – Some pundits are warning that the pickup in job growth should result in wage gains. However, there has been an interesting change to the relationship between hiring and productivity. BLS data indicate that job growth has picked up during the past three months. However, Nonfarm Productivity hasn’t.

LearnBonds: – Will bond prices rise for the next 30 years? – While many market watchers called an end to the 30 year bull run in bonds following the Fed’s infamous “taper call” nearly a year ago, interest rates have fallen rather substantially, surprisingly to many, since the beginning of the year. Indeed, despite the diminishing bond buying activity from Constitution Avenue, the rate on the 10-year Treasury has been edging back towards 2.5% after bumping up against 3% several months ago.

LearnBonds: – Auction rate securities – Meaning and risks. – Auction rate securities are debt instruments in which the interest rate is reset on a recurring basis through a Dutch auction. Auction rate securities help issuers diversify their funding structure by allowing them to pay at variable, short-term rates, compared to traditional bonds that pay a fixed, long-term rate.

LearnBonds: – A guide to utility bonds. – A utility bond is a type of municipal bond that is issued to finance the construction of public utility projects, such as water systems, sewer systems, electrical plants and various public projects. The issuer of a utility bond receives a cash payment at the time of issuance in exchange for a promise to repay the bond holder over time.

Municipal Bonds

Income  Investing: – Low issuance fuels muni market gains despite fund outflows. – Municipal bonds managed to post a pretty strong April, with the broad muni market gaining 1.2% on average, even as municipal bond mutual funds continue to struggle attracting investor cash. Chris Mauro, head of U.S. municipals strategy at RBC, says investors aren’t finding muni yields too attractive right now, and they’re looking more to high-yield munis as an alternative.

Reuters: – U.S. muni bond sales to remain low at $4 bln next week. – U.S. municipal bond sales will total an estimated $4 billion next week, down from a revised estimated $5.8 billion this week, as demand continues to outstrip supply in the paper-starved tax-exempt market.

Main Street: – Municipal bonds are outperforming stocks. – Municipal bonds are offering higher returns than the broader stock market, so far in 2014. Municipal bonds are especially attractive thanks to tax exemptions. When you look at munis, it’s not just what you earn, it’s also what you keep.

Bloomberg: – Delaware selling $113 million debt to refinance road work. – The Delaware Transportation Authority will sell $113.3 million in senior revenue bonds today to reduce its interest obligations on older debt for highway building and repair projects.

Bond Buyer: – High-yield migration – Muni managers seek out attractive returns. – When opportunity knocks in the municipal high-yield sector, municipal fund managers answer.

Reuters: – Detroit leads 2013 U.S. bond defaults: Moody’s. – Detroit accounted for three of the seven defaults last year on municipal bonds rated by Moody’s Investors Service, the credit rating agency said on Wednesday.

MuniNetGuide: – Michael Lewis and today’s muni market. – Despite Janet Yellen’s insistence in her testimony to Congress yesterday that much of the first quarter’s anemic growth is weather-related, the market is still convinced there is an undercurrent of economic weakness out there which is not entirely attributable to the Polar Vortex. As spring finally arrives in most parts of the country, we’ll soon find out if this belief is warranted.

Bloomberg: – Creative ways to fill the nation’s potholes. – Oh, dear. Another crisis. The Highway Trust Fund, which pays for the bulk of federal road and transit spending, is on the verge of insolvency. It faces a shortfall of roughly $63 billion over the next four years and may soon be unable to meet its obligations.

Bond Buyer: – Strategists concerned muni investors can’t manage tobacco bonds’ risk. – Tobacco bonds have lured investors with some of the highest returns in the muni market this year, raising concern among strategists that traditional municipal bond investors’ are taking on too much risk.

 

Treasury Bonds

Bloomberg: – Do we need a 50-year bond? – In 2001, the U.S. Treasury decided to stop issuing 30-year bonds. The budget surplus made the long bond unnecessary and the new tax cuts were going to generate faster growth and abundant revenue. [But] It didn’t quite work out that way.

Businessweek: – Not enough 30-year bonds in $12.1 trillion treasuries market. – In a world awash with U.S. government bonds, buyers of the longest-term Treasuries are facing a potential shortage of supply.

About.com: – Will Federal Reserve rate hikes crush the bond market? – In recent years, investors have been told ad nauseum that the bond market is set to collapse. The thinking behind this widely-held view is that with the U.S. Federal Reserve “tapering” the bond-buying program known as quantitative easing (QE) and likely on track to raise interest rates in 2015, yields have nowhere to go but up. But is this really the case?

Zero Hedge:  – Two more theories to explain the “Treasury bond buying” mystery.  – With everyone and their mom confused at how bonds can rally when stocks are also positive, we have seen Deutsche confused (temporary technicals), Bloomberg confirm the shortage, and BofA blame the weather (for a lack of bond selling). Today, we have two more thoughtful and comprehensive perspectives from Gavekal’s Louis-Vincent Gave (on why yields are so low) and Scotiabank’s Guy Haselmann (on why they’ stay that way).

Income Investing: – ‘Nouveau bond bulls’ suddenly in abundance – Tchir. – The persistent and unexpected strength of long-dated Treasury bonds has given rise to a host of strategists looking to explain that strength and why it could persist. Peter Tchir of Brean Capital today casts a skeptical eye on this crowd. “I have seen a surge in the number of people writing or talking about why the bond market can keep going up,” Tchir writes today. “I am not sure where all these nouveau bond bulls were ahead of last week’s FOMC meeting, but they are apparently everywhere now.”

 

Investment Grade Bonds

Businessweek: – Apple bonds couldn’t stop sales slide as issuers watched Fed. – Even the year’s biggest offering from Apple Inc. (AAPL:US) failed to halt a 33 percent slide in U.S. corporate bond sales this week, as borrowers sought to clarify the Federal Reserve’s outlook for the economy and timetable for withdrawing stimulus.

Donald van Deventer: – The 30 best-value bond trades with maturities of 1 to 5 years. – There were 24,443 bond trades in 4439 non-call fixed rate senior issues on May 2. We rank the 30 best-value trades for maturities of 1-5 years, using the credit spread-to-default probability ratio as criterion for “best.”

ETF Daily News: – Corporate bond ETF for investors to consider. – Thanks to rock-bottom interest rate of government backed bonds which offer safe haven opportunities, the U.S. corporate bond market has been on a rocky path as these normally yield higher than their Fed cousins. Also, a slow-but-steady U.S. market recovery and strengthening of corporate America have helped the related high yield bond market to climb.

 

Junk Bonds

ETF Trends: – Short duration junk bond ETFs in the limelight. – Amid speculation the Federal Reserve is inching closer to raising interest rates, investors are fleeing some longer duration high-yield bond exchange traded funds in favor of junk ETFs with less sensitivity to rising rates.

ETF Trends: – Short duration junk bond ETFs in the limelight. – Amid speculation the Federal Reserve is inching closer to raising interest rates, investors are fleeing some longer duration high-yield bond exchange traded funds in favor of junk ETFs with less sensitivity to rising rates.

Bloomberg: – Junk-bond traders pile onto hedges amid Fed after rally. – With the Federal Reserve getting ready to boost interest rates, investors are adding hedges to junk bonds as they grow ever more expensive versus stocks.

Bloomberg: – Yellen’s influence on the junk bond market.– Bloomberg’s Lisa Abramowicz discusses how markets are reacting to Federal Reserve Chair Janet Yellen’s testimony before the Joint Economic Committee in Washington.

FT: – Investor dash for trash feeds M&A surge. – An important reason why corporate bond markets have rallied this year – pushing prices into what many investors fear is bubble territory – is that corporate treasurers have remained cautious. They have used ever lower borrowing costs largely to refinance existing debt more efficiently; company default rates are still exceptionally low.

 

Emerging Markets

Businessweek: – JPMorgan at odds with IMF in touting emerging-market bonds. –  JPMorgan Chase & Co., the biggest U.S. bank by assets, sees no signs of a bubble in emerging-market corporate debt, challenging the International Monetary Fund’s warning on rising risks in the bond market.

Businessweek: – JPMorgan at odds with IMF in touting emerging-market bonds. –  JPMorgan Chase & Co., the biggest U.S. bank by assets, sees no signs of a bubble in emerging-market corporate debt, challenging the International Monetary Fund’s warning on rising risks in the bond market.

Reuters: – PIMCO’s bad bets on emerging markets add to firm’s troubles. – Betting on emerging markets has led to losses for many over the past year – but among big investors few got the timing of their wagers as wrong as Pacific Investment Management Co, the giant bond firm that has recently been roiled by a rupture at the top.

FundWeb: – Flexible bond managers up emerging market debt exposure. – Bond fund managers with flexible mandates have started to shift money towards emerging market debt as this previously unloved asset class has started to show signs of attractive valuations.

George Bijak: – Emerging markets at risk. – The massive post-GFC Quantitative Easing (QE) in the US, EU and now in Japan has repaired the global banking system’s balance sheet. Debt of various qualities, worth trillions of dollars, was moved from struggling banks to the central banks at book value where it is likely to run out to maturity or roll over.

 

Catastrophe Bonds

The Royal Gazette: – Biggest catastrophe bond deal in history completed in Bermuda. – The largest catastrophe bond transaction in history completed today and was admitted for listing on the Bermuda Stock Exchange (BSX).

Desert News: – Take care with catastrophe insurance bonds. – Through the end of the first quarter of 2014, issuance of catastrophe bonds, or CAT bonds, totaled a reported $4.75 billion. These fixed income bond instruments have generally been structured to pay coupons at relatively attractive levels, compared to many other fixed income securities with similar credit ratings.

Tucker Leppa: – Avoid these 2 high-yield mortgage REITs. – In each of the past five quarters, WMC has seen a reduction in book value. The offering of common stock was priced ~$14.75 net expenses.

Donald van Deventer: – Berkshire Hathaway bonds: Good value, but not best value. – Berkshire Hathaway default probabilities rank in the best 3 percent of all insurance firms, but they are up slightly since September and ratings have been downgraded twice since 2010. Ranked by the credit spread to default probability ratio, BRK bonds rank in the top 20% of all bonds traded on May 5. Still 28 bonds offered a better credit spread to default probability ratio than the best bond of Berkshire Hathaway Finance Corporation.

FT: – Why Buffett is steering clear of catastrophe bonds. – QE is leaving some investors exposed to natural disasters in the reinsurance market.

 

Investment Strategy

Minyanville: – Investing Strategy: Try not to lose money looking for yields. – ETFs with defined maturity dates and market-linked CDs with FDIC backing are two solutions for investors on a fixed income.

FMSBonds: – The best time to get in. – While we, too, celebrate the muni market’s success this year, it’s not germane to the objectives of investors in individual bonds, and a strategy based on accurately guessing the direction of interest rates is doomed to fail.

Wealth Management: – Freak out time is coming. – Fixed-income strategist William Eigen told a standing-room-only crowd at IMCA’s annual conference that traditional fixed-income strategies, the kind that have worked for the past thirty years, aren’t going to cut it in the next year or so.

Income Investing: – Shift from junk bonds into high-yield munis, loans. – Junk-bond valuations are getting a little out of hand, so yield-hungry investors should shift some money out of junk bonds into bank loans and high-yield muni bonds. That’s the verdict of George Rusnak, national director of fixed income for Wells Fargo Private Bank, in his latest weekly outlook piece.

YChart: – Stocks for income / value in bond-loving market. – Sometimes sexy is overrated. We’re nearly a third of the way through the year and it’s those old wallflowers, bonds, particularly municipal bonds, which are outperforming.

WSJ: – Wealth Adviser: In Defense of long-term bonds. – With the prospect of interest rates rising, long-term bonds are seen by many as a bad bet. But that’s “a big lie that keeps being repeated,” argues bond specialist Stan Richelson. For retirees looking for a safe and predictable income stream, “long-term, high-quality bonds as still the best way to go” .

Michael Fabian: – How this top bond fund skirts interest rate fears. – A strategy we have been implementing for clients in our Strategic Income Portfolio during the last several years to take some of the guess work out of interest rate fluctuations is tossing aside traditional fixed-income investments in lieu of multi-sector or strategic income funds.

 

Bond Funds

Bloomberg: – Junk investors prefer short-term as long-term ETFs fade. – Investors in exchange-traded funds that buy junk bonds are shifting into shorter-maturity debt that’s less vulnerable to the Federal Reserve’s withdrawal of stimulus measures.

ETF.com: – Fixed-income ETFs add $2B for week. – ETFs experienced total inflows of $2.78 billion for the week ended Thursday, May 1, and rising markets, spurred on by stronger-than-expected job market data, helped lift total U.S.-listed ETF assets up on the week to $1.761 trillion.

David Fabian: – Are active ETFs worth the management fee premium? – With so many funds now in the mix, ETF providers are continuing to introduce innovative active strategies to compete with established passive indexes.  While active management typically leads to creative portfolios, it also paves the way for higher fees to subsidize research, security selection and trading.

Focus on Funds: – ETFs See $1.5B in inflows last week; Shorting junk bonds, biotech just got pricier. – In its weekly ETF flows report, Credit Suisse’s Victor Lin noted that these products attracted $1.5 billion in inflows through the week ended May 2, “driven mostly by fixed income with the Fed announcing rates would remain close to 0 even after bond purchases end.”

WSJ: – Allianz backs PIMCO, Gross amid struggles. – PIMCO and co-founder Bill Gross got a vote of confidence from owner Allianz SE as the fund company struggles with subpar investment performance and investor defections.

About.com: – Bond funds performing better than expected. – Most stock market observers and financial media pundits were calling for the death of bond mutual funds in 2014 and would have never predicted a positive return by this point in the year. Why are bond prices higher now than at the end of 2013?

Advisor Shares: – Overview of the fixed income market. – It is important to gain an understanding of the fixed income marketplace and the investment options within it.

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Adam Green

Adam Green

Adam Green is an experienced writer and fintech enthusiast. He he worked with LearnBonds.com since 2019 and covers a range of areas including: personal finance, savings, bonds and taxes.