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The number of investors who are bearish on U.S. long-dated Treasuries and reckon their yields will rise climbed to its highest level since late July, according to a J.P. Morgan Securities survey released on Tuesday.
Investors who said they were “short” longer-dated U.S. government debt rose to 42 percent from 36 percent the previous week. This is the largest share of investors who were “short” Treasuries since July 28.
By holding fewer longer-dated Treasuries, investors reduce the duration risk or sensitivity of their portfolios in anticipation of a rise in interest rates. A rate rise causes the prices of longer-dated bonds to fall more than the prices of shorter-dated debt, resulting in larger losses.
Conversely, longer-dated Treasuries produce higher returns than short-term debt in a market rally.
A steady flow of solid U.S. economic data helped push the benchmark 10-year Treasuries yield above 2.60 percent to its loftiest in two months on Monday.
Todays Other Top Stories
Learn Bonds
LearnBonds: – Making sense of forward guidance and an “extended period” – One of the more effective actions taken by the Fed was extending forward guidance. This was when the Fed said it would keep rates low for an “extended period of time.” However, the Fed has hinted it might shift to a data-based guidance model in the near future, what does this all mean?
Municipal Bonds
Bond Buyer: – Muni funds can take the spotlight by buying green. – Municipal bond fund managers are finding they can stand out from the competition and lure new investors by taking advantage of this year’s flood of green bonds.
Business Insider: – RICH BERNSTEIN: There’s only one part of the bond market I like. – As mentioned, investors may be underestimating the risks of non-US debt and over-estimating the risks associated with high yield munis. Through time we have found some startling mispricings between these two asset classes. Our current example certainly fits that description.
Jake Zamansky: – Like villains from a James Bond flick, hedgies coolly play their hand in Puerto Rico. – (Registration required) Hedge funds own 10% of Puerto Rico’s bonds. The funds are exerting influence over the government. The funds are seeking short-term gains at bondholders’ expense.
ElliottWave: – Looming Municipal crisis: Debt piled too high to pay back? – Former New York lieutenant governor Ray Ravitch sees more Detroit-like bankruptcies ahead for municipalities. In a May essay in the Wall Street Journal, Ravitch says that despite huge looming pension shortfalls, many cities and states continue to borrow far beyond their means.
Bloomberg: – Century of debt suiting Ohio state at these rates. – Ohio State University is joining issuers going into hock for 100 years as dwindling borrowing costs kindle the appeal of locking in interest rates for a century.
MoneyBeat: – Schumer pushes looser restrictions on munis in bank rule. – A top Senate Democrat is ratcheting up pressure on regulators to ease restrictions on municipal debt from a post-crisis bank financing rule.
Bond Market
Bloomberg: – Bond market dispels inflation alarm as Fed winds down QE. – As the Federal Reserve winds down its third round of unprecedented stimulus, one thing has become increasingly clear in the bond market: the U.S. economy just isn’t going to grow enough to upend demand for Treasuries.
Treasury Bonds
Reuters: – Bargain hunters push up prices on drooping data. – U.S. Treasury debt prices broke a slide and rose on Monday as bargain hunters bought on signs of spotty economic growth, which might slow the Federal Reserve’s shift away from loose monetary policies.
Tom Dorsey: – Treasury bond bump scares market into sell-off of mREITs and financial stocks. – (Registration required) Federal Reserve Statement on September 16 will indicate the Fed’s direction for the next 6 months. Change in the interest rates are coming, adjustments will be made. mREITs will be stronger after the adjustments are steadied.
Investment Grade Bonds
WSJ: – Smaller firms taking corporate bond dealing share from top banks. – The top five banks dealing in U.S. corporate bonds have lost market share to smaller firms, according to figures from researcher Greenwich Associates, the latest sign of the financial-sector shake-up being driven by tougher rules and bank retrenchment.
High Yield Bonds
Forbes: – U.S. high yield bond issuance nears $11B in uneven market. – Despite a handful of shelved offerings amid a more deliberate investor market, U.S. high yield bond issuance racked up $10.7 billion in volume last week, after a healthy $11.6 billion recorded the previous week, according to S&P Capital IQ/LCD. Year-to-date volume now stands at $230 billion.
Emerging Markets
Financial Planning: – Advisors weigh pros & perils of emerging market bonds. – Emerging markets bond funds topped all fixed-income categories with a 10-year annualized return of 8.3% through last month, nearly double the 4.4% return of domestic long-term bond funds, according to Morningstar.
Bloomberg: – There’s a $1.6 trillion emerging-market bond fever worrying BIS. – Bond buyers have generally grown more risk-averse as 2014 drags on — except when it comes to emerging-market debt.
Investment Strategy
Gary Gordon: – Bond ETFs: Selling the rumor, buying the news. – (Registration required) After three years without corrective activity, some folks may be shunning the shares of corporations that tend to suffer the most in downdrafts. If the global economy is weakening – if the weakness is likely to drag on U.S. corporations – then what is the justification for buying more U.S. stock?
Jason Draut: – Diversification at its best. – (Registration required) Illustrating the benefits of diversification using SPY and TLT. Show how rebalancing annually can enhance returns. Using volatility, Sharpe ratio and maximum drawdown to better understand portfolio construction.
Morningstar: – For safety and yield, where best to park your cash? – Short-term bond funds offer better rates than many money markets but also may carry higher risk.
BlackRock: – Millennials: Bonds aren’t just for old people. – Many younger investors believe they should swing for the fences in their portfolio and take as much market risk as they can. Matt Tucker explains how bonds can have a place in any portfolio, even if you’re a Millennial.
Bond Funds
Zacks: – PowerShares adds laddered bond ETF to suite. – Though interest rates are currently at ultra-low levels, concerns over interest rates rising earlier-than-expected are looming large. This is especially true, as the U.S. economy is building up momentum with accelerating growth and a strengthening job market that led the Fed to wind down its bond-buying program completely by October.
Investment News: – Wells Fargo expanding bond fund and ETF use in SMAs. – Firm’s managed accounts can make greater use of products like bond mutual funds and ETFs over individual bonds in model portfolios.
McPiro: – Vanguard high dividend yield ETF will continue to outperform In 2015. – (Registration required) 2015 will continue to be a good year for dividend-paying funds. VYM has the benefits of a mutual fund, with a much lower cost. If rates rise less quickly than expected, VYM will outperform the market.
Kiplinger: – 5 Best low-cost mutual funds. – Here you will find Steven Goldberg’s five favorite low-cost funds—four actively managed products and one index fund.
Gross: Yellen will be careful tomorrow. Japanese “lost decades” argue for accepting risk of higher inflation here in the US.
— PIMCO (@PIMCO) September 16, 2014
@DanGallagherSEC blasts FSOC for failing to spot bond mkt risks ‘right under their noses’, regulators too concerned w/ designating Metlife
— Silla Brush (@sabrush) September 16, 2014
Nothing more nerve wracking than waiting for prepays to come out on high premium MBS
— David Schawel (@DavidSchawel) September 16, 2014
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