Yellen’s Biggest Battle and Today’s Other Top Stories

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Yesterday’s announcement that the Federal Reserve will continue to taper its bond purchases by another $10 billion down to $65 billion a month, didn’t come as much of a surprise to the market.

There were some concerns that the continued turmoil currently enveloping emerging markets, along with some pretty dire jobs data of late, may cause the Fed to postpone tapering at this session. But the Fed is having none of it, failing to even mention the emerging market meltdown in its statement.

It is clear then that the Fed has chosen a path and its going to take something pretty major for them to deviate from it. Economist Tim Duy says that. “The Fed wants out of quantitative easing. Policymakers want to normalize policy by bringing it back to interest rates. That sets a high bar to delaying the tapering process.”

Indeed, Bank of America strategists are of the same view, they expect the FOMC will continue to taper by that same $10 billion per-meeting amount, meaning the Fed will be out of the QE business completely by December.

If anything this makes incoming Fed president Janet Yellen’s job a little easier. The tapering of the Fed’s bond-buying program is often cited as her biggest priority. Move too quickly and she could derail the recovery; act too slowly and she risks triggering runaway inflation.

Yet some analysts believe that this will be the most straightforward of tasks. “Monetary policy has already been set on a course before her arrival, so to some extent what she has to do is ‘nothing’,” Paul Ashworth, chief US economist at Capital Economics, said.

No, her biggest challenge is going to be generating enough inflation to meet the central bank’s target of 2 percent.

While central bankers may be running out of new ways to try to boost growth, their unprecedented accommodation so far has kept inflation expectations from falling because investors have confidence the Fed will do whatever it can to prevent deflation, Dana Saporta, an economist at Credit Suisse Group AG told Bloomberg.

To succeed, Yellen will to have to lean harder on the message of a slow exit to keep those expectations up, said Ethan Harris, co-head of global economics research at Bank of America Corp. Once they “start to drop, you’ve already lost the war.”

 

Todays Other Top Stories

Municipal Bonds

ValueWalk: – Explaining Puerto Rico’s falling bond yields. – Puerto Rico is either close to default or pulling through with enough liquidity to benefit from the US recovery (no one would argue the island is doing great), but Moody’s Corporation has threatened a downgrade and everyone knows the risk in Puerto Rican muni bonds is high, so it’s strange that the yield has fallen since the beginning of the year.

Bloomberg: – Travelers sweet-spot call vindicated in bond rally. – A rebound in the $3.7 trillion municipal market is vindicating investments from Travelers Cos. (TRV) and Loews Corp. (L), which bet on local debt even as individuals fled at a record pace.

The Economist: – Bail-out by the back door. – DID Uncle Sam bailout Puerto Rico while nobody was looking? That seems to be the conclusion of an interesting analysis which gets deep into the weeds of the near-bankrupt island’s tax code. Th e focus is on an excise tax that was introduced to Puerto Rico in late 2010. Act 154, as it is called, sounds pretty boring. But wait for the details.

CNN Money: – How marijuana munis could save the states. – Bonds backed by billions of dollars in pot sales taxes could shore up hard-hit state budgets — that is, if the feds would get out of the way.

 

Education

LearnBonds: – Why Treasury rates are falling again. – I have written several posts recently about how cash flows throughout the world have impacted the United States bond markets and influenced the level of interest rates in America.  The cash flows I have been talking about in the past have been those funds that have left European financial markets and flown to the United States…and then returned to Europe.

ETF Database: – Why duration matters. – A major fixed income strategy in 2013 was duration rotation, investors reducing the interest rate risk of their portfolios. As the term “duration” becomes increasingly prevalent in our conversations on The Blog and elsewhere, I thought it would be good to explain this concept.

 

Treasury Bonds

Marketplace: – What investors love about the Treasury’s new toy – it floats! – The U.S. Treasury rolls out a brand new toy today. Now, we’re talking about the Treasury here, which means the toy is a kind of bond, but investors are excited for a couple of reasons. It’s the first new product the Treasury has released in years, so there’s a novelty appeal. And, unlike all of the rest of the Treasury’s products, this toy floats!

 

Corporate Bonds

BusinessWeek: – Credit swaps in U.S. fall as economy grows; Verizon plans bonds. – A measure of U.S. corporate credit risk declined as data showed the economy expanded at a 3.2 percent pace in the fourth quarter and Americans’ spending climbed. Verizon Communications Inc. (VZ:US) is planning a bond sale.

 

High Yield

Zacks: – 5 Highest yielding Zacks #1 ranked high yield bond mutual funds. – These lower rated securities carry high coupon yields to compensate investors for the associated risk. However, they can maximize total returns by generating high interest income and capital appreciation over the long term. Mutual funds investing in these securities significantly reduce the associated risk through diversification and should be a part of the portfolio of every investor looking at maximum returns.

Digital Journal: – Increased risk, yet a positive 2014 for U.S. leveraged credit. – In its outlook for 2014, DDJ Capital Management, LLC, an institutional manager of high yield, special situations and bank loan investments for investors worldwide, forecasts increased risk along with positive returns for investors in non-investment grade bonds and leveraged loans, which comprise the U.S. leveraged credit market.

BusinessWeek: – PIMCO says high-yield bond buyers to collect coupons in 2014. – Pacific Investment Management Co., the world’s largest bond manager, expects speculative-grade bond investors to largely collect the coupons paid by the debt in 2014 after an average 20 percent gain in the last five years.

 

Emerging Markets

WSJ: – Emerging-markets believers keep the faith. – Financial advisers say they are undeterred by the selloff of emerging-markets investments, although they are spending time calming down jittery clients.

 

Catastrophe Bonds

Artemis: – More state & government backed catastrophe bonds expected. – We should expect to see more catastrophe bonds being issued by state and government backed insurance entities in the future, as investor demand remains high and costs of sponsoring a cat bond come down, according to Fitch Ratings.

 

Investment Strategy

Trefis: – How to profit from the coming rush in bonds. – The following chart suggests that investors are leaning towards security—in this case, the bond market—and not really participating in the stock market. They don’t like risk. This can be an indicator of where the key stock indices may be headed next.

 

Bond Funds

WSJ: – Long-term mutual fund inflows $7.8 billion in latest week. – Long-term mutual funds posted estimated inflows of $7.8 billion in the latest week, as investors put more money into equity and hybrid funds, according to the Investment Company Institute.

ETF Daily News: – 3 bond ETFs seeing strong inflows. – 2013 can easily be labeled as a year which brought out clear winners and losers in the investment world. While equities clearly won the show, bonds and commodities were struggling in the red.

iShares Blog: – Loving Bonds (Conditionally): Fixed income investing themes for 2014. – Wondering how to invest in the bond markets in 2014? In a summary of his “My Favorite Themes,” Jeffrey Rosenberg discusses why he (conditionally) loves bonds, why short-duration strategies are at risk and what areas of the market look attractive.

ETF Trends: – ETF Chart of the day: Bond bash. – Even though bonds have staged an impressive rally throughout January of this year, with benchmark ETFs such as TLT (iShares Barclays 20+ Year Treasury Bond, Expense Ratio 0.15%), which had a $101 handle in late 2013 trading as high as $108.15 yesterday, we continue to see evidence of institutional buying in the space, even at these price levels.

Investing.com: – The experts say…Buy bonds? – That seemed to be the thrust of the 2014 Barron’s Roundtable.  After a year that was brutal for all income-oriented investments, the panelists on Barron’s annual Roundtable—which include some real heavyweights such as Pimco’s Bill Gross, O.S.S. Capital’s Oscar Schafer, GAMCO Investors’ Mario Gabelli and Goldman Sachs’ Abby Joseph Cohen, among others—are broadly bullish on bonds.

 



 

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