U.S. government bonds are in for a rough ride during 2015. That seems to be the message forecasters on Wall Street are sending.
With Federal Reserve Chair Janet Yellen poised to raise interest rates in 2015 for the first time in almost a decade, prognosticators are convinced Treasury yields have nowhere to go except up.
Forecasters calls for higher yields are the most aggressive since 2009, when U.S. debt securities suffered record losses, according to data compiled by Bloomberg.
Getting it right hasn’t been easy. Almost everyone who foresaw a selloff this year as the Fed ended its bond buying was caught off-guard as lackluster U.S. wage growth and turmoil in emerging markets propelled Treasuries to the biggest returns since 2011. Now, even as the bond market’s inflation outlook tumbles, forecasters are sticking to the view that Treasuries are a losing proposition as the economy strengthens.
“Next year should be the break-out year finally,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., told Bloomberg. “The market is ignoring the rhetoric that Yellen and the FOMC is getting closer and closer to tightening. The market has it wrong.”
Todays Other Top Stories
Learn Bonds: – U.S. economy should continue to expand 3.00% to 3.50%. – During the past two days we have heard diatribes regarding why the bond market “has it wrong,” why inflation/wage growth has to pick up next year, why QE “will save Europe” and why 2015 will be the year housing rebounds (in spite of this morning’s Case Shiller data which indicates that real estate price increases continue to slow). Let’s break this down, piece by piece.
Barron’s: – “Build America” bond portfolio led the strong-performing muni ETF pack this year. – Four years after the last Build America Bonds were issued, the taxable debt is delivering the biggest gains among exchange-traded funds focused on municipal securities, writes Bloomberg, in a story assessing the mun sector’s returns this year.
Investor Village: – Tobacco bond rating racket exposed – muni madness. – Tobacco bonds were enthusiastically sold by Wall Street and enthusiastically rated by the bond rating agencies. Looks like quite a few of those bonds will go into default.
WSJ: – U.S. Muni-bond market is on a tear. – (Subscription) Municipal bonds are on a winning streak that many investors bet will run into the new year.
Bloomberg: – Munis dominate in yearlong advance Wall Street analysts missed. – Municipal-bond investors who ignored the consensus forecast a year ago that interest rates would rise are proving to be the biggest winners in 2014.
ETF Trends: – Build America bond ETFs lead in munis market. – Municipal bonds have surprised this year, rallying for 10 consecutive months through October, and Build America Bond exchange traded funds are putting the rest of the munis market to shame.
Bloomberg: – Muni bond sales top $43 billion in December, year’s high. – States and local governments boosted debt sales to $43.7 billion so far in December, the highest monthly total in at least a year.
Market Watch: – Here’s how stocks and bond yields could rise together. – It’s a widely held expectation that stocks should fall as bond yields rise, but history — and recent experience — shows that isn’t necessarily so.
Businessweek: – U.S. bond sentiment is worst since disastrous ’09. – Get ready for a disastrous year for U.S. government bonds. That’s the message forecasters on Wall Street are sending.
Morningstar: – Treasury bonds strengthen on Greece’s political uncertainty. – Treasury bonds strengthened Monday as the latest political turmoil in Greece boosted demand for haven assets.
Investment Grade Bonds
WSJ: – Debt investors looking to profit from oil collapse. – (Subscription) The collapse of oil prices is uncovering a well of opportunities for corporate-bond investors looking ahead after a year of healthy returns and record-high debt sales.
High Yield Bonds
Bloomberg: – Traders dive into junk-bond ETF hedges on oil concerns. – Plunging oil prices have left options traders bracing for more losses in high-yield debt. Options hedging against swings on an exchange-traded fund tracking the bonds cost the most since 2010 versus those on an ETF following Treasuries and were at an almost six-year high relative to contracts on a Standard & Poor’s 500 Index fund. Investors are wary of the debt after crude oil sank almost 50 percent since June given the high proportion of high-yield bonds from energy companies.
Investorplace: – 3 Best high-yield bond ETFs. – ETFs have turned my investment strategy upside-down. You can get just about any investment in the form of an ETF, giving you that precious instant diversification. Like mutual funds, however, you have to weigh what each ETF brings to the table.
ETF Trends: – Options traders prep for more junk bond ETF declines. – HYG is off 3.1% this year, but the ETF’s declines and those of its rivals have worsened in the back half of the year as oil’s slide has gained speed. HYG is off 5.6% over the past six months as the United States Oil Fund has plunged nearly 47% over the same period. The message from the options market regarding HYG is clear: More declines are on the way.
Income Investing: – Junk bonds will beat high-grade bonds in 2015. – Morningstar today peers into its corporate bond crystal ball and sees a better future ahead for high-grade bonds than their high-yield brethren in 2015. Morningstar says credit spreads show corporate bonds are fairly valued, but the recent tailwind from declining interest rates “was the main driver for corporate bond returns” but now that favorable condition “has likely run its course.” From Dave Sekera, director of corporate bond strategy at Morningstar.
FT: – EM portfolio flows suffer sharpest slump since “taper tantrum”. – (Subscription) Portfolio flows into emerging markets (EM) suffered their sharpest slump in December since the 2013 “taper tantrum” as the Russian currency crisis and sliding oil prices intensified risk aversion among both equity and debt investors, according to estimates by the Institute of International Finance (IIF), a global association of financial institutions.
Artemis: – No Odile loss for MultiCat Mexico 2012 catastrophe bond. – Investors in the MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes will not face any loss due to September’s hurricane Odile as calculation made using the latest data from the NHC deems the parametric trigger had not been triggered.
Globe and Mail: – Income investing: Green bond market is ‘exploding’. – Investors who want to add environmentally friendly investments to their portfolio without embracing a lot of risk don’t have much choice. Most renewable energy stocks have taken wild swings in the past few years.
CNN: – The best way to invest for retirement income. – When it comes to tapping savings in retirement, many retirees fall into what I call the”Income Investing Trap.” They tilt their portfolios almost exclusively toward “income” investments – dividend stocks, high-yield bonds and annuities. They figure this is the best way to assure a safe supply of spending cash throughout retirement. Big mistake.
Financial Post: – The worst investments of 2014: Eurozone, energy firms, Pimco and more. – Canadian stocks had another disappointing year after an autumn pullback turned the S&P/TSX composite index from one of the developed world’s best performers to one of its worst. But Canadian stocks certainly weren’t the most woeful investment. Here are five of the biggest losers in 2014.
Morningstar: – What investors resolve to do in the New Year. – The end of the calendar year is a time of reflection for many investors. It’s a time to review the performances of individual investments and of our portfolios overall. But in addition to looking back, it’s also a great time to look ahead to the future and to identify things we’d like to do differently–or to continue doing well–in 2015 and beyond.
See It Market: – ETF Investing: A look at where to invest in 2015. – As investors move forward into 2015, many of them will make decisions about where to put their money. However, what we know is that most people are “bad” at investing and trading, don’t have a formal plan, and are likely to underperform their benchmark index over time. Fortunately, developing an objective plan is something that’s well within the reach of all investors, traders, and managers.
Zacks: – Best ETF Strategies for 2015. – With the economy growing at the fastest clip in more than a decade, stocks are expected to continue their upward move, as companies will be able to boost their profits. Plunging energy prices and low interest rates will further benefit stocks.
Reuters: – U.S. based bond funds post $9.4 bln outflows in latest week. – Investors in U.S.-based mutual funds pulled $9.4 billion out of bond funds in the week ended Dec. 17 on profit-taking following gains in bonds this year, data from the Investment Company Institute showed on Tuesday.
ETF Daily News: – Bond ETFs to generate income for your portfolio. – Though investors have been continuously shifting their exposure to the equity world in the second half of the year thanks to a steadily improving U.S. economy, the fixed income world is also in great shape as a result of global market turmoil.
ETF Daily News: – Best and worst bond ETFs of 2014. – The U.S. stock markets delivered a somewhat muted performance this year (at least when compared to 2013) with the S&P returning about 12% YTD gains. Amid such a situation, it would be interesting to note which ETFs were the leaders and laggards in the bond space during 2014.
CNBC: – 10 rookie ETFs that raked in the 2014 cash. – It’s tough to launch new ETFs and find success. That’s been the case for years, and 2014 was no exception.
ETF Daily News: – Regulators worry some ETFs fail to track market prices. – Even a truly innovative “killer app” can be dangerous if used in the wrong way. Exchange-traded funds have been the most successful new mainstream investment product of the past couple of decades, going from a quirky novelty in the late ‘90s to more than $2 trillion in assets today covering nearly every corner of the markets.
Morningstar: – The year in bond funds. – Coming into 2014, prognosticators had the fixed-income markets all figured out. Many posited that it would be a rough year for U.S. It’s fair to say that script played out differently. Below we recap several of the biggest stories in bond fund land from 2014.
UST yield curve (30yr – 3mo) has flattened from 389 on 12/31/13 bps to 275 bps through 12/29/14. Good predictor of growth rate.
— Bob Brinker (@BobBrinker) December 30, 2014
Many say long USTs have rallied as they’ve become more attractive versus bunds etc. Others say strong $, lower LT inflation expectations,etc — David Schawel (@DavidSchawel) December 29, 2014
@paweeky Outside of consensus views (lower oil and rates) proved to have value in 2014 e.g., return on bonds and closed end muni funds
— Douglas Kass (@DougKass) December 30, 2014
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