Best of the Bond Market for October 22nd, 2012
Bloomberg: – Pimco love affair with Mexico forces yields down. – Bill Gross’s embrace of the Mexican bond market is repelling the nation’s pension funds. Mexican pension funds are allocating less money to peso notes as unprecedented investment by foreign investors, including Gross’s Pacific Investment Management Co., triggered a rally that cut yields on debt due in 2024 to a record low of 5.1 percent in July.
David Schawel: Wall St. Falls of the Wagon – every now and then Wall Street reminds us that it has “fallen off the wagon,” so to speak, and reverted back to scary old ways of the bad old days. One of those old tricks is to add unnecessary leverage to assets that may not be safe to begin with. And one of those reminders came recently when UBS announced a new 2× leveraged mortgage REIT exchange-traded note (ETN).
BusinessWeek: – Fed may add treasuries to QE3. – The world’s biggest bond traders say the Federal Reserve will decide before year-end to buy Treasuries in addition to purchasing $40 billion of mortgage bonds a month as gains in U.S. employment and consumer confidence prove unsustainable.
Rick Ferri: In the long-term, lower trending interest rates tend to foster higher P/E ratios higher – That has not happened yet in this cycle, but I believe the probability is high that continued low interest rates will nudge stock prices up into higher multiples of earnings, assuming earnings continue to grow at a modest rate.
Random Roger: What to do if interest rates rise – We own a combination of shorted dated corporate bonds with very little interest paid but we avoid interest rate risk. We own short dated foreign sovereign debt which typically yields a little more but does take currency risk. We have a couple of preferred stocks–the yield there is pretty good. And we own a few other things via funds like emerging markets that also have decent yields.
WSJ: – Demand for unrated corporate debt rises. – Could it be that the three major ratings agencies are losing their grip on rating investment-grade corporate debt? Four recent bond offerings from unrated companies which saw blow-out demand suggests this might be the case.
Michael Aneiro: Wells Fargo says its too early to abandon high yield bonds – Not to worry, says Jim Kochan of Wells Fargo Advantage Funds, at least for a while. He points out that risk premiums over Treasuries are still above their historic averages, and the default rate remains below its historic average, and is expected to stay there. Beyond that, investors need to be mindful of the unusual nature of the current interest-rate cycle, which still augurs well for the high-yield market, and that recessions are greater threats to high yield than periods of rising interest rates.
CNN: – It’s time to get choosey about junk bonds. – There’s a raging bull market in junk bonds these days. Income-starved investors have been flocking to riskier, but higher-yielding, corporate bonds in search of higher returns. Many observers are now warning of a bubble. However, it’s not too late to add junk to your portfolio — as long as you choose very carefully.
Reuters: – Calpers gets tough with San Bernardino over missed payments. – In the opening skirmish of a battle over how local governments deal with soaring pension costs, America’s largest public employee retirement system made clear on Friday it would not tolerate a city deciding to miss a payment.
Bloomberg: – Philadelphia schools lure buyers as budget erodes. – Philadelphia’s school district, the nations eighth-largest, is in such desperate shape that it plans to sell $300 million of bonds this week to plug a deficit. Yet investors hungry for yield have fueled a rally in its debt.
HJ Sims: – 10 reasons to invest in Puerto Rico bonds. – In the last several months, some reporters have suggested selling your Puerto Rico Bonds. Others have suggested reducing your holdings, or at least placing an upper limit to the percentage of Puerto Rico bonds within your portfolio. One pundit suggested avoiding Puerto Rico bonds completely. Being contrarian from time to time, I would suggest that this is the wrong time to be shying away from Puerto Rico debt and its higher than average yields and triple-tax exemption advantage.
Bloomberg: – San Bernardino faces SEC probe after plundering sewer funds to pay expenses. – San Bernardino, the bankrupt California city facing an inquiry by the U.S. Securities and Exchange Commission, masked its growing deficits by using funds meant for sewers, roads and construction to cover current expenses, according to city records.
Learn Bonds: – What Romney’s tax plan would mean for investors. – If you don’t have a clear idea on what Romney would try to do with taxes if he is elected, you’re not alone. Unfortunately, there seems to be more coverage of Mitt Romney’s tax returns than his tax policy. Below is an outline of his announced tax policy and its potential impact on investing.
Morningstar: – Bond investors key to the economy. – Strong economic data and global stimulus hopes overcame weak corporate earnings in the bond market last week. Based on the strength earlier in the week, the average credit spread in the Morningstar Corporate Bond Index tightened 10 basis points last week to +133, approaching levels not seen since 2007.
Reuters: – Treasuries come under pressure as investors take profit. – U.S. Treasury prices came under selling pressure on Monday as market participants took profits on gains made on Friday and as yields on 10-year bonds tested key technical levels.
Advisor One: – High yield bonds are cooling but state bonds are hot. – Municipal bonds tied to the tobacco settlement have been smoking lately, returning over 19% so far this year, but that doesn’t mean investors should inhale. Indeed, all the smoke may be beginning to suppress investor appetite for the high-yield segment of the muni market, which in the aggregate has notched a 15% year-to-date return.
FT: – Inflows hit high yield bond market. – Active fund managers are frequently being forced to take short-term positions in exchange traded funds to access the underlying high-yield bond market, a new report reveals, as staggering inflows into the sector spark liquidity problems.
Reuters: – U.S. corporate bond new issues. – The following are lists of upcoming high-grade and high-yield corporate bond offerings in the United States.
Gross: Fed merry-go-round: inflate stocks til 2000. Then inflate housing til 2007. Then inflate stocks til 2012. Now inflate housing again.
— PIMCO (@PIMCO) October 22, 2012
— Cate Long (@cate_long) October 22, 2012
#muniland its going to be an absolute price/liquidity/convexity bloodbath when the music stops
— Muni Trader (@MuniTrader) October 22, 2012
@c_c_saunders I think bond investors should know how a 1994 like event would impact their holdings
— David Schawel (@DavidSchawel) October 22, 2012