This Week’s Top Bond Market Stories – November 9th Edition

 

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Learn Bonds

Learn Bonds: – Bond buying criteria. – So you want to buy a corporate bond? There are many factors to consider as you decide on exactly which bond(s) you are going to reach for. Buying individual bonds carries a lot more risk than most people may realize, because if something unexpected occurs, you have no diversification That’s why I always prefer bond ETFs or mutual funds.

Learn Bonds: – How a more transparent Fed has increased market volatility. – To investors, volatility is not a good thing. To many analysts, volatility is the definition of risk. The volatility of bond prices is the essence of risk to the investor in bonds because it means that one is never sure what price one might be able to buy…or sell bonds at…if one needs to trade bonds.

Learn Bonds: – Avoid this risk tolerance mistake. – Investors are not always honest with themselves about their risk tolerance. Most investors overestimate how much risk they are willing to accept. And, some even drastically underestimate their willingness to handle risks in the stock market.

Learn Bonds: – Don’t waste your time with TLT. – With tapering off the table for the foreseeable future, Larry Summers not getting the nod for Fed Chairman, and nothing indicating a change to the slow-growth economy in which the U.S. is mired, some investors may be thinking about allocating money to U.S. Treasuries. For those investors, I have the following suggestion: Don’t waste your time with TLT.

 

Municipal Bonds

American Century Blog: – What’s happening in the municipal bond market? – 2013 has been a volatile year for the municipal bond (muni) market, in contrast to two consecutive prior years (2011-12) of outperformance. That two-year rally followed the late 2010/early 2011 sell-off triggered in part by a forecasted wave of muni defaults. No such wave materialized, but isolated high-profile events have continued to crop up, including Detroit and Puerto Rico.

Schwab: – Schwab bond insights: State municipal bonds: Evaluating where to invest. – “How can I determine which states to invest in?” This is one of the most common questions about municipal bond investments. While the answer will depend on the individual’s specific situation, it’s also important to know the characteristics analysts look at to assess the relative strength of each state.

CNBC: – Puerto Rico: Sand, rum and some risky bond income. – Puerto Rico is $70 billion in debt; has $37 billion of unfunded pension liabilities, an unemployment rate of nearly 14 percent, and a population of just 3.6 million, which has been on the decline as people and corporations leave the cash-strapped island. So what’s it to investors?

USA Today: – How Puerto Rico’s debt woes affect fund investors. – If you own a tax-free municipal bond fund, you probably own a bit — or a lot — of Puerto Rico’s debt, even if your fund specializes in debt from your home state. So what’s the risk?

Forbes: – How did UBS recommend Puerto Rico junk for mom and pop clients? – How on earth could trusted, so-called UBS “financial advisors” recommend that conservative and retired investors in Puerto Rico fill their accounts with Muni Bonds which have near junk ratings?

WSJ: – SEC fines a muni bond issuer for first time; underwriter penalized. – The Securities and Exchange Commission handed out its first-ever financial penalty against a municipal-bond issuer, fining an agency that developed an ice-hockey arena in Washington state for misleading investors.

ValueWalk: – The key issues in today’s muni bond market. – Investing in high quality municipal bonds paying a predictable cash flow and returning your principal at the end of the investment is a well-trodden system for lifetime economic success. In this article we discuss some key issues in purchasing municipal bonds to help you make wise choices for your investing system.

Main St: – Municipal bonds offer investors unique opportunity. – Despite the fact that municipal bonds are outperforming U.S. Treasuries, investors are pulling money from municipal bond funds due to the recent federal government shutdown and rumors of city bankruptcies.

ETF Trends: – Advisors like the new spin on muni bond ETFs. – There are more than 20 exchange traded funds offering investors exposure to municipal bonds, which at the end of the first quarter represented over $3.7 trillion, or 9.6%, of the total U.S. bond market.

Focus on Funds: – Beware muni ‘yield hog’ funds. – Municipal bonds and the funds holding them look compelling after the midyear selloff, which ushered in the return of the 5% muni. Just make sure your fund manager isn’t is a “yield hog.”

 

Treasury Bonds

MarketWatch: – Treasury yields jump on brighter economic outlook. – A robust jobs report caught the Treasury market by surprise on Friday, sending benchmark yields sharply higher as investors began to price in nearer-term expectations for when the Federal Reserve could start scaling back its bond-buying stimulus.

WSJ: – U.S. Treasury to introduce floating-rate notes. – The U.S. government on Wednesday set plans to sell a new type of debt that pays more interest as market rates rise, marking its first new product since the introduction in 1997 of Treasury notes that protect buyers against inflation.

ETF Trends: – Treasury ETF bull roars back. – U.S. Treasuries tumbled earlier this year after the market predicted an imminent change to Federal Reserve policy. However, investors are taking a second look at bond exchange traded funds as economic strength falters and Fed tapering is pushed to the back burner.

BusinessWeek: – Treasury 10-year yield falls from 3-week high as growth slows. – Treasury 10-year note yields fell from almost the highest level in three weeks as Federal Reserve officials highlighted a lack of strength in the U.S. economy before data this week forecast to show expansion slowed.

Benzinga: – Government to run budget deficits until 2038; How can money printing stop? – The stock market is certainly getting all the attention these days, but not a lot is said about other disturbing fundamentals. These fundamentals are troublesome, and if they aren’t fixed, the U.S. economy could end up in a downward spiral in a very short period of time. With these conditions, those who are saving and investing for the long term can face a significant amount of scrutiny.

Forbes: – ‘Back-door’ method for getting paper I bond. – For those investors who prefer paper I Bonds to the electronic I Bonds issued via TreasuryDirect, and/or for those who want to increase their annual allocation from $10,000 per person, there’s still a back-door option that allows you to purchase an additional $5,000 in paper I Bonds per tax return per year.

 

Investment Grade

Donald Van Deventer: – BP PLC bonds: An updated market view. – The BP PLC subsidiary BP Capital Markets PLC is one of the most heavily traded bond issuers in the domestic U.S. corporate bond market. Bonds issued by BP Capital Markets PLC have a guarantee of the parent BP PLC. For convenience, we discuss both legal entities today as if they were indistinguishable from a bondholder’s perspective. We analyzed BP PLC group bonds on August 7, 2013 using data as of August 6.

Tabb Forum: – Exchange trading of corporate bonds must wait. – Entrepreneurs seeking structural change in the corporate bond market should focus first on creating alternatives to corporate bond mutual funds.

BusinessWeek: – Liquidity drought allayed in Fed-fueled trading: Credit markets. – Corporate bond trading volumes are surging the most since 2008 as buyers wager they’ll be able to reap more gains before the Federal Reserve starts tapering stimulus that’s fueled a record rally in the debt.

ETF Trends: – New investment grade bond ETF hedges against rising rates. – In anticipation of a rising rate environment, ProShares is expanding its interest rate hedged bond exchange traded fund suite to include an investment grade debt play.

FT: – Debt sale rush ahead of holiday season. – Sales of investment-grade debt this week may surpass the $25bn mark as global corporations attempt to raise this year’s final batch of funds at low borrowing rates, ahead of the forthcoming holiday season, analysts said.

WSJ: – Funded status of U.S. corporate pensions rises to 91.8% in October. – Strong equity and fixed income returns in October contributed to rising assets for corporate defined benefit plans, public defined benefit plans, and endowments and foundations in the U.S., according to the BNY Mellon Investment Strategy & Solutions Group (ISSG). The funded status of the typical U.S. corporate plan rose 0.8 percentage points to 91.8 percent in October, ISSG said.

 

High-Yield

Forbes: – High yield bond funds see first cash outflow since September. – Retail cash flows to high-yield funds turned negative in the week ended Nov. 6, with a net $879 million withdrawn, according to Lipper, a division of Thomson Reuters . This is the first negative reading in the weekly figure dating back nine weeks, and it wipes out the $753 million inflow last week.

WSJ: – Overheard: Junk-bond party. – Michael Milken, eat your heart out. U.S. high-yield issuance for the past week totaled $15.4 billion, a new record according to Dealogic. World-wide issuance set its own high, $16.6 billion, besting the previous high of $16 billion set earlier this year.

MarketWatch: – Junk bond rebound renews hunt for yield. – Junk bond prices have been creeping higher in recent weeks, prompting some market commentators to suggest risk premiums being paid to holders of the lowest quality corporate bonds are starting to once again look measly.

Focus on Funds: – Is there an ‘ETF effect’ in junk bonds? Answer: Yes. – Can heavily traded exchange-traded funds force higher prices into the junk-bond market? Maybe not on their own. But it sure looks to be true of indexed bonds as a whole.

Kiplinger: – A juiced-up junk bond fund. – One of the top-performing junk funds over the past year, Northeast Investors Trust, is one of the oldest and one of the most aggressive. The fund can invest up to 20% of its assets in stocks, and it can employ leverage—that is, use borrowed money to attempt to boost returns. The fund went to a 20% leveraged position last June after big selloffs in the stock and bond markets, says co-manager Bruce Monrad. As of early October, he says, the fund is no longer leveraged, though it does have 12% of its assets in stocks.

Financial News: – High-yield market goes transatlantic. – European borrowers are benefiting from high investor demand for access to the debt markets and a shortage of deals, with refinancings dominating the landscape amid a scarcity of sponsor-backed mergers and acquisitions.

Income Investing: – Junk bonds gain in October. – Junk bonds will look back fondly on October, with the high yield market returning 2.51% during the month, according to Barclays, boosting year-to-date returns to 6.33%.

 

Emerging Markets

Farm Futures: – Emerging markets worry over tapering. – Slowing the pace of bond buying by the Federal Reserve, as the U.S. economy begins to show signs of life, has emerging market economies around the globe concerned.

Bloomberg: – Emerging markets super-cycle promises growth. – The emerging-markets juggernaut that propelled the globe out of the 2009 recession is taking a pause rather than running out of steam.

Invesco: – Diverging emerging markets: Separating the strong from the vulnerable. – In our view, none of the major emerging market countries is in imminent danger of experiencing a collapse harkening back to the late ’90s (such as the Asian debt crisis, the Mexican Tequila crisis and the Russian default of 1998). However, we do anticipate clear market differentiation among sovereigns going forward, with marked distinctions between strong and vulnerable economies.

The Economist: – Emerging market cause sleepless nights. – After a decade-long boom, emerging markets have flopped and then bounced in the past six months. The gyrations are not over yet.

Emerging Markets Daily: – Here comes an index for EM local currency corporate bonds. – Indexing is important, because asset managers use indices to benchmark against their portfolios. Financial companies are more likely to launch new funds in a new asset class when there is an underlying index.

BusinessDay: – EM Central banks and prospects of Fed tapering of QE. – The zero interest rate policy (ZIRP) and quantitative easing embarked upon by Central Banks in most developed economies has led to a flood of money moving into emerging and frontier capital markets.

Emerging Markets Daily: – EM bond outflow, equity inflow continued in October; LatAm no One’s lover. – Emerging-market equity funds shone in October, reflecting the recent recovery in stocks from once-battered markets like India, Turkey and Brazil.

MoneyBeat: – Emerging-market equity funds make a comeback in October. – Tapering uncertainty led to a difficult summer for global bond markets, especially emerging market debt which saw significant falls over the period. The fixed income exposure we have is to more esoteric credit markets, such as junior debt and convertible bonds. With rates rising, convertible bonds are firmly back on the issuance menu for CEOs, and the pipeline is rumoured to be substantial. New issuance is good as it expands the universe and creates new investment opportunities.

 

Catastrophe Bonds

WSJ: – Q3 2013 Sees highest catastrophe bond issuance in 15 years, says Willis Capital Markets & Advisory. – The third quarter of 2013 saw $1.4 billion of non-life catastrophe bond capacity issued through seven bonds, in comparison with $0.5 billion issued through three bonds in the third quarter of 2012, according to Willis Capital Markets & Advisory.

FT Adviser: – Product review: Schroder GAIA Cat Bond fund. – Schroders plans to capitalise on the popularity of cat bonds with a new fund, but how will it invest?

Artemis: – New York MTA seeking support for potential future cat bonds. – First Mutual Transportation Assurance Co. (FMTAC), the New York State-licensed captive insurer subsidiary of the New York Metropolitan Transportation Authority (MTA), is seeking support in connection with potential future catastrophe bond transactions it may sponsor.

Artemis: – Queen Street II Capital cat bond collateral also affected by debt ceiling. – Another of reinsurer Munich Re’s catastrophe bond transactions has been adversely affected by the uncertainty over the U.S. debt ceiling. Queen Street II Capital Ltd. has suffered a loss of principal in the collateral account due to a decline in its per-unit mark-to-market value.

 

Bond Funds

Reuters: – U.S. bonds surprise by hanging tough after rough summer. – The U.S. bond market is enjoying a resurgence, to the surprise of investors who just weeks ago were resigned to the idea that 2013 was going to be the worst year for bonds in more than three decades.

Financial Chronicle: – Mutual funds trim exposure to financial, capital goods stocks. – Bond fund managers toned down average maturity or duration in the months of June and July, with bond yields hardening substantially. However, fund managers increased duration in the month of August, and maintained similar levels of duration at the end of September as well.

Forbes: – Fidelity throws down the gauntlet for low cost ETFs, 8 to buy. – Long in coming, and tracked, documented and commented upon by me every step of the way, on October 24 Fidelity launched its first fleet of exchange-trade funds: 10 new passive sector ETFs began trading on the New York Stock Exchange.

WSJ: – Long-term mutual fund inflows $5.84 billion in latest week. – Long-term mutual funds rose by $5.84 billion in the latest week on gains to stocks and hybrid funds, according to the Investment Company Institute.

Felix Salmon: – When bonds don’t trade. – Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even government debt.

Investment News: – ‘Perfect storm’ for tax swaps means potentially fruitful strategy for advisers. – How to use the drop in bond prices and the rise in other assets to your tax advantage.

About.com: – October 2013 bond market performance overview. – October was a positive month for the global bond markets, bringing fixed-income investors closer to the break-even point in terms of their year-to-date returns. Bonds continued the rally that began in September after U.S. Federal Reserve Chairman Ben Bernanke surprised the markets by announcing that the Fed would not in fact taper the bond-buying program known as “quantitative easing” (QE).

Market Realist: – The FOMC and ISM report drive REITs and builders. – Long-term interest rates are priced off the benchmark long-term bond, which is the ten-year Treasury. These days, the ten-year bond reacts to economic data through the Federal Reserve’s asset purchase program, also known as quantitative easing (or QE). As a general rule, economic data that shows weakness is bond bullish (positive). However, data that shows strength isn’t necessarily bond bearish (negative).

 

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