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CNBC reports today that 2013 is the worst year in history for bonds, with mutual fund outflows approaching $72 billion so far this year, according to data from TrimTabs. This surpasses the previous record set in the bond massacre of 1994 when outflows amounted to $63 billion.
While this makes a great headline, its not strictly true. CNBC have conveniently forgotten to take into account inflation. If the 1994 figure is adjusted for inflation, we get a staggering $99.28 billion. So while 2013 has been a bad year for bonds, it still has a way to go before becoming the all time worse.
Bond outflows started in May this year when Fed Chairman Ben Bernanke first mentioned the possibility of tapering back its monetary stimulus program. Since then the 10-year Treasury yield has risen from 1.6% to almost 3% in September, when economists and investors initially expected the Fed to take action.
Outflows took a breather in October, after the Fed chose not to taper, with the 10-year Treasury yield falling back to around 2.5%. But they are slowly creeping up again as taper talk has resumed. The 10-year currently yields around 2.88%.
So yes, 2013 has been unlucky for bonds, but it’s far from the worst performance ever. In fact the bond market has held up remarkably well, with some sectors like junk bonds showing strong growth.
As we move into 2014 there is still the threat of tapering hanging over the market. But its pretty clear that the message about maintaining low interest rates going forward is getting through. So a taper in either December or early next year, shouldn’t shock the market like it did back in May.
Todays Other Top Stories
Investment News: – Muni market beware: Puerto Rico running out of time. – As if fears over rising interest rates and months of mass selling weren’t enough of a head wind for municipal bond investors, Puerto Rico now appears to be running out of time to get its fiscal house in order. The commonwealth was put on review by another major ratings agency, paving the way to what could be a shock to the municipal bond market.
MyMoneyBlog: – Picking municipal bond funds & the importance of low fees. – Due to a lack of tax-deferred space, my current tax bracket, and the current interest rate spread over US Treasury bonds, I started investing part of my portfolio in Vanguard’s tax-exempt municipal bond funds. As a result, I try to read every single muni bond article that Vanguard puts out. In this month’s blog post Municipal debt, Detroit, and diversification, one of the topics covered was the importance of minimizing fund fees.
WSJ: – Illinois draws demand for first debt issue after pension vote. – Illinois sold $350 million of taxable bonds on Thursday at lower yield premiums than a similar sale in April, marking the latest sign that investors are encouraged by the state’s pension reforms.
LPL Financial – Anthony Valeri: – Municipal-Treasury yield ratio at low end of recent range may make munis more sensitive to Treasuries over near-term. – Municipal valuations have improved since September, making municipals more sensitive to Treasuries.
LPL Financial – Anthony Valeri: – The incredible shrinking muni bond market. – This chart show how much the Municipal bond market has contracted since the end of 2010.
ETF Daily: – Does your 2014 investing list include Munis? – Tis the Season … for (what else?) lists. There are shopping lists, wish lists, nice lists and, for those of you shopping for investment ideas, BlackRock’s recently released list of five things to know and five things to do in 2014. (My colleagues, Russ Koesterich and Jeff Rosenberg blogged about it earlier this week.) Among those five “to do’s” is to consider adding municipal bonds to your portfolio.
Learn Bonds: – Preferred Stocks: Better than bonds but act just like them. – With bond yields struggling, investors might be wondering if the bond market is no longer a place to put all their fixed income investment dollars. Fortunately, there is an alternative that doesn’t get much coverage in the financial press that provides diversification with bond-like regular income along with the possibility of capital gains.
Bloomberg: – Treasuries fluctuate amid speculation Fed will slow bond buying. – Treasuries fluctuated as data indicating the world’s biggest economy is accelerating overshadowed a report that wholesale prices unexpectedly declined in November amid speculation the Federal Reserve may reduce bond purchases as soon as next week.
Financial Post: – Investors need to be picky when it comes to corporate bonds. – Corporate bonds in Canada and the U.S. should continue to be a main fixed-income holding in 2014, but investors will need to be far more selective with their picks in order to maximize returns.
Business Week: – JPMorgan sees bulls in high-grade debt. – Investors surveyed by JPMorgan Chase & Co. are the most bullish on investment-grade bonds in more than nine years as they demand the least relative yields since the start of the financial crisis. Arch Coal Inc. plans to raise $300 million in a private offering of secured notes.
FT: – Investors up on junk bond see-saw for now. – Consensus is clear: Growth will continue next year, but not so fast that it tests central banks’ commitments to keep rates low for longer. The belief which follows is that shares keep going up, but more slowly, while bonds will go down (and yields rise).
Forbes: – Retail cash inflows to high yield mutual funds wipe out ETF outflows, positive return. – Retail cash flows to high-yield funds returned to positive territory with a net inflow of $16 million for the week ended Dec. 11, according to Lipper, a division of Thomson Reuters. An inflow of $108 million to mutual funds outweighed an outflow of $92 million from exchange-traded funds.
Forbes: – Fundamental high yield corporate bond portfolio breaks below 200-day moving average. – In trading on Friday, shares of the Fundamental High Yield Corporate Bond Portfolio ETF (AMEX: PHB) crossed below their 200 day moving average of $19.13, changing hands as low as $19.12 per share. Fundamental High Yield Corporate Bond Portfolio shares are currently trading trading flat on the day.
Focus on Funds: – Upside is limited for high-yield ETF. – Unlike, say, munis or Treasury bonds, junk bonds are turning in a strong 2013. Barclays Capital’s derivatives gurus aren’t expecting a repeat.
Citywire Money: – JPM’s Stealey exits local currency emerging market bonds. – Bond manager cuts exposure after recent rally but believes long-term fundamentals remain in place.
Morningstar: – The 4 flavors of emerging-markets bond funds. – Many managers focus on currency denomination or corporate debt, while others are beginning to take a total-return approach.
Morningstar: – Emerging-markets bond breakdown. – With more than $9 billion in total exchange-traded fund assets, emerging-markets bond ETFs have grown quite popular with investors in the past few years. The emerging-markets bond category has grown into a collection of strategies that offers very different exposures with unique risks.
Morningstar: – Top Picks for Emerging-Markets Bond CEFs. – Emerging-markets funds have historically played a small (or even nonexistent) role in most investors’ portfolios, but as the developed world remains in a no- to low-growth holding pattern, investors have increasingly turned to riskier assets in an effort to meet their investment goals.
FT: – Looking to emerging markets in 2014. – What can an investor do when deposit rates are so low and bonds look vulnerable? This central question hangs over investment today just as it did at the start of the year. Rising interest rates can be bad news for quoted investments.
StarTribune: – Investors are moving into stocks and away from some bonds, flipping years of behavior. – After years of sticking with plain-vanilla bond funds, investors are starting to turn their backs on them and opt for stocks instead. The move isn’t big enough to be the “great rotation” from bonds to stocks that many experts predicted — it’s more of a good rotation — but fund managers say more is on the way.
ETF Trends: – Some new ETFs are off to fast starts. – Roughly 140 exchange traded funds and exchange traded notes (ETNs) have come to market this year. As is the case with any year’s crop of new ETFs, some are off to faster starts than others.
ETF Trends: – iShares plans active interest rate hedged bond ETFs. – With the threat of rising interest rates looming over the bond market, BlackRock’s iShares, the world’s largest ETF issuer, is working on a handful of active bond exchange traded funds to help investors hedge against rate risk.
ETF Database: – Preparing for 2014? BlackRock’s “The List” can help. – As 2013 draws to a close, you may be wondering what to expect in the year ahead, and how to prepare your portfolio accordingly. To help you, Russ outlines the five things you should know, and the five “what to do” investing ideas, that make up BlackRock’s “2014 Outlook – The List.”
ETF Trends: – iShares launches new short-duration bond ETF. – BlackRock’s (NYSE: BLK) iShares unit, the world’s largest issuer of exchange traded funds, added to its lineup of short-duration bond ETFs today with the debut of the actively managed iShares Liquidity Income ETF (BATS: ICSH).
Potential muni bond volume next week should total $2.59B, from $8.38B this week, per Ipreo, The Bond Buyer and Thomson Reuters.
— James Ramage (@RJamesRamage) December 13, 2013