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BlackRock bond fund manager, Ian Winship, has identified four bond market fears and main areas of concern for fixed income investors this year. Winship also revealed how investors can negate the impact of any downturn.
Bonds have started the year well considering last years bloodbath, with emerging market woes hitting equities hard, prompting investors to run for cover in the bond market. But with rate hikes drawing ever closer, the bond market isn’t out of the woods yet.
So what are the main risks for investors in 2014, and how can they prepare for them?
1 Central banks
There was a time when central banks all sang from the same hymn sheet, but over recent months central bank policy has diverged. While the U.S. is tapering and the UK economy improving, the Bank of Japan has embarked on an aggressive quantitative easing programme.
Winship says. “This is the first time in a long time central banks are not doing the same thing, even when we look at smaller banks, such as in Canada and Australia,”
“Fixed interest investors were used to all banks moving in the same direction, but now it is time to look at relative value trades, such as European long/short.”
2 Emerging markets
Emerging markets have been hit hard by the prospect of the Fed tapering back its bond purchases. While some investors see this as a good entry point, Winship warned that it’s important to separate “the good ones from the bad ones”.
“If there is a negative event this year, it will be in emerging markets,” he said. “Turkey, South Africa and India are doing well, so that is the way we play it, but we are avoiding countries like Ukraine and Venezuela.”
Winship says trading currencies in the past year has been difficult for fixed income managers, with many emerging market currencies heavily affected by the recent sell-off. As a result, most managers have made the same consensus calls on the major global currencies.
“Everyone is long the dollar and sterling, and short the euro and yen, but they have got that trade wrong,” Winship said this has created opportunities: “We are concerned about this huge consensus trade; instead, we are long the euro, as well as the Australian dollar.”
There have been concerns over liquidity in the corporate bond space for quite some time, we have mentioned it before on several occasions. But Winship warned that even government bonds are “really tough to sell” at the moment. His solution is to “look for hundreds of little trades, not one big trade” in order to spread the risks across a large pool of assets.
You can read the full interview here.
Todays Other Top Stories
BusinessWeek: – Chicago cut to three steps above junk by Moody’s before sale. – Chicago’s credit rating on $7.8 billion of general-obligation debt was cut one level to Baa1 by Moody’s Investors Service, which cited “massive” pension liabilities for the third-most populous U.S. city.
BondBuyer: – Obama again proposes 28% cap, AFF bonds in fiscal 2015 budget. – President’s Obama $3.9 trillion fiscal 2015 budget, released Tuesday, proposed capping the value of the tax exemption for municipal bond interest at 28%, which market participants complain would amount to an unprecedented tax on municipal bonds.
Reuters: – Variable-rate munis could stabilize this year -Moody’s. – After declining for years, the outstanding amount of U.S. variable-rate demand bonds could begin to hold steady because of rising interest rates and improving credit conditions for the banks that support such debt, Moody’s Investors Service said in a report released on Tuesday.
Roll Call: – Local governments fear plan to tax bond interest threatens road funding. – House Ways and Means Chairman Dave CAMP proposed tax overhaul got high marks last week from federal transportation leaders for committing to prop up the ailing Highway Trust Fund, but it is drawing criticism from state and local officials who depend on municipal bonds to finance infrastructure projects.
Black and Veatch: – U.S. municipal bond market holding at a steady pace amid major headlines. – Despite Detroit’s bankruptcy filing and worries over the Fed’s quantitative easing policy, the bond market is still liquid and accessible.
JD Supra: – Anatomy of a bond issue: The participants and the steps. – For many local government officials and solicitors in Pennsylvania, a bond issue is a rare occurrence perceived to be shrouded in mystery. Like most things in life, it is only mysterious because it is unfamiliar. Once you understand the participants and the steps, the process makes more sense.
Bloomberg: – New York City wrapping up $695 million tax-exempt muni offering. – New York City is set to wrap up a $695 million issue of tax-exempt bonds today as it offers the debt to institutional investors, in its first general-obligation sale since Mayor Bill de Blasio took office Jan. 1.
Market Realist: – Comparing high yield bonds and investment-grade corporate bonds. – The risk associated with investment-grade corporate bonds is less than high yield bonds. The difference between the rates of return for investment-grade corporate bonds and high yield bonds is known as the “junk-to-investment-grade spread.” This spread, also called “credit spread,” is the premium investors demand in order to hold high yield bonds over lower-yield investment-grade corporate bonds.
The Federalist: – Putin adviser threatens to dump U.S. Treasury Bonds in response to sanctions. – An adviser to Russian President Vladimir Putin said Tuesday that authorities would issue general advice to dump US government bonds in the event of Russian companies and individuals being targeted by sanctions over events in Ukraine.
Market Realist: – Why demand for Treasuries is on the rise despite falling rates. – Demand for Treasury notes (TLT) was higher last week. Both the State Street Investor Confidence Index and Consumer Confidence Index posted strong institutional investor sentiments despite the decline in retail sales, which could have an adverse impact on the margins of big retailers such as Wal-Mart Stores, Inc.
WSJ: – High-grade firms dive in debt market. – Highly rated companies sold about $19.5 billion of bonds in the U.S. on Tuesday, the busiest day of the year, as corporations took advantage of a recent rally in benchmark U.S. Treasurys to lock in low rates.
Abba’s Aces: – High-yielding Cisco has more downside to come. – Fundamentally CISCO is inexpensively priced based on future earnings but expensive on future growth potential. Financially, I believe we have a high yield that is secure but the financial management ratios are deteriorating. But on a technical basis I believe there is more downside to come. Due to the expensive growth fundamentals, bearish technicals, and deteriorating financials metrics I’m not going to pull the trigger on this particular name right now.
Citywire: – Investment grade corporate bonds face uphill struggle. – Investment grade corporate bonds had a poor 2013, with funds suffering significant outflows, and managers are divided over the sector’s prospects.
Pragmatic Capitalism: – Marks & Gundlach: Beware junk bonds. – There’s been some cautionary commentary in recent months from some bond market heavyweights. Most notably, Howards Marks and Jeff Gundlach. In a Bloomberg interview today, Marks said you need to be cautious about low quality issuers.
The Star Phoenix: – Down on loonie and junk bonds. – Dan Janis, lead portfolio manager for Manulife Asset Management’s international fixed-income strategy, is anticipating higher interest rates in some segments of the bond market, so he’s been upgrading the quality of his portfolio holdings – which includes limiting exposure to the Canadian dollar.
Yahoo Finance: – Why high yield means more interest risk than investment-grade bonds. – Other things being equal, bondholders in the fixed income market are essentially exposed to two significant risks: credit risk and interest risk. Except for U.S. Treasury bonds (TLT), which are considered the safest asset class, all other fixed income assets are prone to credit risk. Credit risk varies with corporate credit ratings. Another major risk that impacts almost the entire financial market is interest rates.
BusinessWeek: – Bond allocation probe seen symptomatic of race for yield. – The federal investigation into the way banks divvy up new corporate-bond sales may shed light on a side effect of regulations that were designed to make the financial system safer.
Reuters: – Anxious investors may opt to hunker down at home. – Scared money seeking a safe haven may just head for home, providing a boost for Treasuries and corporate bonds.
FuturesMag: – Bonds susceptible to fall. – The bonds might start to build some downside momentum, especially if we start to see more consistently positive economic data from the jobs, manufacturing, and housing sector in the United States. We would not at all be surprised to see the bonds approach 2013 lows and potentially break them. The real key in our view will be the jobs and inflation data.
LearnBonds: – An evaluation of Vanguard Total Bond ETF (BND). – Holding over 6000 bonds and a possessing a minuscule 10 basis point management fee, the behemoth Vanguard Total Bond Market ETF, ticker BND, is often referred to as a one-stop shop for investment grade fixed-income investors. In this article we’ll take a look at some of the critical vitals and yield and give an evaluation of Vanguard Total Bond ETF in an attempt to decipher if it is a worthy portfolio solution or not.
ETF Trends: – New AdvisorShares ETF targets yield, volatility protection. – AdvisorShares, one of the largest issuers of actively managed ETFs, will introduce the AdvisorShares YieldPro ETF (NasdaqGM: YPRO) today. YPRO is an ETF “fund of funds” that holds both long and short fixed income investments.
Bloomberg: – PIMCO overhauls unconstrained fund as Gross takes control. – PIMCO Unconstrained Bond Fund (PUBAX), one of the firm’s most important offerings as clients turn away from traditional fixed-income products, overhauled its investments in the fourth quarter, when Bill Gross replaced Chris Dialynas as manager of the $25.6 billion fund.
Larry Fink: “Having a flexible and active allocation to fixed income seems sensible in these markets.” #FinkatNAPF
— BlackRock® (@blackrock) March 5, 2014
— Brian Chappatta (@BChappatta) March 5, 2014