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Bill Gross has a lot on his plate these days, single handedly running the world’s largest bond fund. But that hasn’t stopped him posting monthly investment outlook. Which is must read material for most investors.
This month Gross talks about the amount of leverage in the U.S. economy. Saying that the central bank must accommodate debtors by keeping its key lending rate low. The general consensus seems to be that the Fed funds rate, now anchored near zero, will begin to rise in the second half of 2015. But counter to many analysts, Gross thinks the rate will stop rising sooner than expected. Sooner, even, than the Fed expects. Here’s what he said:
“Estimates which average less than 2%, are much closer to financial reality than the average, 4% “blue dot” estimates of Fed “participants,” dismissed somewhat by Fed Chair Janet Yellen herself last month. Why is this academic “Fed Fight” important to markets? Well, if a bond investor knew whether 4% or 2% was the long term neutral policy rate, he/she would literally have the key to the kingdom.”
This falls in line with the view of New York Fed President William Dudley who gave an important speech in May of 2012 suggesting a “neutral real rate” close to 0% which would imply a 200-basis-point nominal rate if the Fed’s inflation target was hit.
So what does this mean for fixed income investors? While a lower funds rate would mean a less rocky path higher as the Fed elevates its funds rate, it also means yields will remain lower, and bond investors will earn less interest.
But fixed income investors don’t need to take this lying down. There are ways to fight back, – most of which involve taking different risks than you may be commonly used to taking says Gross: alternative assets, hedge funds, leveraged closed-end funds, a higher proportion of stocks vs. bonds in a personal portfolio, are all potential solutions in yield starved world.
You can read the full investment outlook here.
Todays Other Top Stories
Municipal Bonds
Montrose Daily Press: – Watch for different risk levels of “muni” bonds. – Are you thinking of investing in municipal bonds? — although some “munis” are subject to the alternative minimum tax. However, since not all municipal bonds are the same, you’ll want to know the differences — especially in terms of risk.
Bloomberg: – Puerto Rico debt rallies on budget that avoids borrowing. – Prices on Puerto Rico’s junk-rated debt rose to the highest in almost three weeks after an official said Governor Alejandro Garcia Padilla plans to balance the next budget without deficit financing.
Yahoo Finance: – Municipal bonds in 2014: General obligation bonds down but not out. – Total municipal bond issuance in the first quarter of 2014, was $62.6 billion, down ~26% from the $84.3 billion issued in the first quarter of 2013. Issuance in February was just $15.6 billion, a 14-year low. Increasing interest rates were largely responsible for the declining trend in issuance.
Bloomberg: – Defaults fall to 2009 level as riskiest debt rises. – Municipal bonds are defaulting at the slowest pace in at least five years as a growing economy lifts the most speculative corners of the $3.7 trillion market.
Reuters: – Issuance malaise’ continues in U.S. municipal bond market. – Sales of U.S. municipal bonds continued to fall this month, marking the lowest April since 2011, preliminary Thomson Reuters data released on Wednesday shows.
Education
Market Realist: – Must-know drivers that impact Treasury yields and ETFs like TLT. – Yield is the annualized return on investing in a bond, considering both coupon payments and redemption value (normally the face value). Like all other returns, bond yields are quoted in percentages.
Treasury Bonds
WSJ: – Treasurys hold gains after Fed decision. – Treasury bonds held gains Wednesday after the Federal Reserve decided to reduce its monthly bond purchases to $45 billion, as expected.
Businessweek: – Treasury floater demand outstrips fixed-rate average fourth time. – Demand at the Treasury’s sale of $15 billion of two-year floating-rate notes outstripped that at auctions of conventional fixed-coupon debt for the fourth straight time as investors searched for better options to money-market securities.
FT Adviser: – Managers anticipate government bond yield rises. – BlackRock’s Ian Winship says a 2.6-2.7% yield on US 10-year bonds is far too low as he shorts the securities.
Corporate Bonds
IFR Asia: – Orders pour in for Apple’s US$12bn bond offering. – Investors rushed on Tuesday to get a piece of Apple’s new US$12bn seven-part bond deal, just the company’s second foray into the US bond market.
Junk Bonds
Income Investing: – Junk-bond default rate will double after TXU Bankruptcy filing. – In the most long-anticipated bankruptcy filing in years, Energy Future Holdings Company finally threw in the towel today and filed for Chapter 11 bankruptcy protection in Delaware. Because of the the firm’s outsize debt burden and oversized footprint in the junk-bond and bank-loan markets, its bankruptcy filing will cause the junk-bond default rate to double, according to Fitch Ratings.
Businessweek: – Apollo’s Rowan sees ‘danger signs’ of crisis in debt markets. – Apollo Global Management LLC (APO:US) co-founder Marc Rowan said he sees many signs of a bubble in the credit markets that could lead to another financial crisis.
Bloomberg: – Shale drillers feast on junk debt to say on treadmill. – Rice Energy Inc. (RICE), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.
FT Adviser: – High-yield issuance set for record 2014. – Investor appetite for high-yield fixed income is rising as companies seek to refinance debt and investors look for portfolio diversification, Patrick Zeenni has argued.
Emerging Markets
Investing.com: – 5 Reasons to now choose local vs. foreign emerging market debt. – In the current state of gradual and uneven recovery of EM assets, we favour a rotation from foreign to local currency fixed income instruments in many emerging markets, especially in countries where the interest rate cycles are peaking.
Investment Strategy
LearnBonds: – Are you a bond investment activist or pacifist? – One of the basic decisions one faces when building and managing a bond investment portfolio, or stock portfolio for that matter, is whether an active or a more passive strategy will be employed. With both schools of thought having its own sets of pros and cons, how you invest comes down to a matter of personal preference.
Business Standard: – Leading investors lift equity holdings; cut bonds, emerging stocks. – The world’s top investors added exposure to equities this month and cut bonds and cash as they grew increasingly confident that geopolitical tensions are unlikely to derail the global economic recovery, Reuters polls showed on Wednesday.
InvestmentNews: – Take charge with fixed income strategies for a rising rate environment. – As the bull market celebrates its fifth birthday, the party favors that financial advisers may be wishing for most – other than predictability over the next five years – are answers.
Bond Funds
MarketWatch: – Hedge fund manager whitebox launches tactical income mutual fund. – Veteran Alternative Fixed Income Team to Manage Fund CEO Redleaf: “Low yields are disappointing many investors. We search the entire fixed income market to focus on pockets of opportunity that the benchmark-hugging funds might only be able to participate in peripherally.”
Reuters: – European funds cut bond holdings to 3-year low. – European fund managers cut bond holdings to their lowest in nearly three years and boosted equities as expectations grew that a brighter economic outlook would eventually lead to higher interest rates, a Reuters survey showed on Wednesday.
ETF.com: – EM Bond, Treasury ETFs top April flows. – Investors poured more than $3.25 billion into U.S. and international bond ETFs in April, and no fixed-income segment was more popular than emerging market bond funds. Long-dated U.S. Treasury ETFs came in second.
Worah: ECI up only 1.2% annualized. Wages hardly growing. Easy money by itself cannot create high pay jobs. Need education & infrastructure
— PIMCO (@PIMCO) April 30, 2014
RT @JohnCanally: Better than expected Chi.PMI data for Apr. continues data theme; Q1 data-bad; Q2 data improving rapidly as the weather…
— AnthonyValeri (@Anthony_Valeri) April 30, 2014
Moody’s, which already has negative outlook on New Jersey, calls revenue shortfall credit negative. Negative negative negative #negative
— Brian Chappatta (@BChappatta) April 30, 2014
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