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Investors have become uneasy about the prospect of owning bonds, ever since the Fed hinted that it may begin to scale back the level of bonds it purchases as part of its Quantitative Easing program. When the Fed stops buying, interest rates will rise and that is bad news for bondholders, so the theory goes.
But despite the fact that the Fed opted to postpone the tapering of its QE program and hinted that it will maintain its near-zero policy rate until at least 2016, investors have yet to fully return to the fixed income fold.
Individual investors in particular are choosing to “wait out” the market by holding cash. But is this the best strategy? Jon Short, Head of PIMCO Global Wealth Management in New York, says not.
Writing for Barron’s, Short says:
“Clients concerned about bond volatility may be tempted to abandon the market until prices stabilize. Indeed, from May through August some $43 billion left U.S. taxable bond funds (Strategic Insight), and moved largely to cash and money markets. While the positive nominal return from these assets may be reassuring, it’s also important to recognize that there are trade-offs.”
“Nominal yields on cash-equivalent instruments are negligible – three-month Treasury bills returned around 0.05% in late October – a level unlikely to improve as long as the Fed maintains its target rate at zero (likely until 2016). Furthermore, real returns are negative even at today’s paltry inflation rates; over the past decade, an investment in three-month Treasury bills provided an annualized real return of –0.77% as of September 30. That’s a steep price to pay for perceived safety.”
So what are the alternatives? Short says, by reinvesting the income and proceeds of your maturing bonds in securities that pay a higher coupon, you can increase the income you receive, and your future growth potential.
By smartly reinvesting as interest rates gradually move up can increase bond returns and sure beats hoarding cash, writes Pimco’s wealth-management chief.
You can read the full article here!
Todays Other Top Stories
ETF Trends: – Advisors like the new spin on muni bond ETFs. – There are more than 20 exchange traded funds offering investors exposure to municipal bonds, which at the end of the first quarter represented over $3.7 trillion, or 9.6%, of the total U.S. bond market.
Focus on Funds: – Beware muni ‘yield hog’ funds. – Municipal bonds and the funds holding them look compelling after the midyear selloff, which ushered in the return of the 5% muni. Just make sure your fund manager isn’t is a “yield hog.”
MarketWatch: – Puerto Rico muni bonds lure bargain hunters. – Puerto Rico municipal bond prices have been falling at a startling pace this year, sent skidding by investors jittery over the U.S. territory’s financial straits and a weak market environment. But signs are emerging that the island’s tax-exempt bonds may have reached the bottom.
The Portland Mercury: – Let’s talk municipal finance. – Portland’s water and sewer bureaus’ strong credit ratings allow us to borrow millions of dollars at cheaper interest rates. And one of the things that help the utilities get such favorable marks is a willingness to raise sewer and water rates—the targets of an aspiring ballot measure— to cover costs and debt payments. If we stopped raising those rates, while at the same time continuing to pursue projects we’re locked into (think the federally mandated burying of the water reservoirs), it’s possible Portland could be downgraded. Then we’d almost certainly attract higher interest rates.
MuniNetGuide: – The selling of Puerto Rico’s sales tax bond. – Puerto Rico municipal bond prices have been falling at a startling pace this year, sent skidding by investors jittery over the U.S. territory’s financial straits and a weak market environment. But signs are emerging that the island’s tax-exempt bonds may have reached the bottom.
Chris Mier: – The best trade on Puerto Rico may have already been done! – Puerto Rico paper has rallied dramatically in the wake of an announcement on October 10th of a planned Investor Webcast (held on October 15th) by the Government Development Bank (GDB). Spreads to MMD, as shown by the frequently traded Puerto Rico General Obligation 5% coupon bonds of 2041, have narrowed a full 100 basis points in two weeks! Now the trade can be reversed to capture the excess performance and return to a more modest benchmark exposure (if any is desired). That’s an exercise in seeking, and finding, alpha!
Bloomberg: – Best rally fueled by history signaling supply drop: Muni credit. – The municipal market’s biggest rally since 2004 is paving the way for gains in this year’s final months amid a history of dwindling local-debt supply and bets the Federal Reserve will extend its monthly bond buying.
FT: – The CCRC industry’s latest short-term financing vehicle has risks of its own. – Born from frustrations with variable-rate demand structures, a new fixed-rate structure has become the borrowing vehicle of choice for many continuing care retirement communities (CCRCs). But as the first round of these new occupancy-contingent deals begin to mature, investors are wrestling with a new set of problems – particularly in distressed situations, said two portfolio managers who invest in CCRCs.
MMA: – Municipal issuer brief November. – This issue covers the new SEC News Advisor rule, current market conditions & what new bank rules mean.
Learn Bonds: – Don’t waste your time with TLT. – With tapering off the table for the foreseeable future, Larry Summers not getting the nod for Fed Chairman, and nothing indicating a change to the slow-growth economy in which the U.S. is mired, some investors may be thinking about allocating money to U.S. Treasuries. For those investors, I have the following suggestion: Don’t waste your time with TLT.
Forbes: – ‘Back-door’ method for getting paper I bond. – For those investors who prefer paper I Bonds to the electronic I Bonds issued via TreasuryDirect, and/or for those who want to increase their annual allocation from $10,000 per person, there’s still a back-door option that allows you to purchase an additional $5,000 in paper I Bonds per tax return per year.
Financial News: – High-yield market goes transatlantic. – European borrowers are benefiting from high investor demand for access to the debt markets and a shortage of deals, with refinancings dominating the landscape amid a scarcity of sponsor-backed mergers and acquisitions.
Income Investing: – Junk bonds gain in October. – Junk bonds will look back fondly on October, with the high yield market returning 2.51% during the month, according to Barclays, boosting year-to-date returns to 6.33%.
Forbes: – High yield bond volume slips to $27B amid still-hot market. – High yield bond issuance in the U.S. slipped to $27 billion in October after a red-hot September, which saw a record $47.7 billion in activity, according to S&P Capital IQ/LCD.
FT Adviser: – Doubts raised over high-yield bond claims. – Fixed income managers debate value seen in high yield market.
Bond Vigilantes: – A quick look at Asia: Corporate fundamentals and credit tightening. – As Mike just reported, we remain concerned with a number of internal issues as well as external vulnerabilities facing emerging markets. With economic growth fuelled by excessive credit growth, deteriorating current account balances and potential contagion risk if the Fed tightens monetary policy (leading to capital flows back to the US and Europe), another big sell-off can certainly not be ruled out. Combining the above with what are now fairly unattractive valuations, the overall macro EM story continues to be a none too compelling one for us.
Hedgeweek: – Assets to love and leave. – Tapering uncertainty led to a difficult summer for global bond markets, especially emerging market debt which saw significant falls over the period. The fixed income exposure we have is to more esoteric credit markets, such as junior debt and convertible bonds. With rates rising, convertible bonds are firmly back on the issuance menu for CEOs, and the pipeline is rumoured to be substantial. New issuance is good as it expands the universe and creates new investment opportunities.
WSJ: – Fed’s Powell: Eventual pullback shouldn’t hurt emerging-market economies. – When the Fed begins pulling back on its unconventional policies, it is likely to affect capital flows to emerging market nations, but there is no reason that should hurt the economies of those countries, a governor said.
Artemis: – New York MTA seeking support for potential future cat bonds. – First Mutual Transportation Assurance Co. (FMTAC), the New York State-licensed captive insurer subsidiary of the New York Metropolitan Transportation Authority (MTA), is seeking support in connection with potential future catastrophe bond transactions it may sponsor.
Artemis: – Queen Street II Capital cat bond collateral also affected by debt ceiling. – Another of reinsurer Munich Re’s catastrophe bond transactions has been adversely affected by the uncertainty over the U.S. debt ceiling. Queen Street II Capital Ltd. has suffered a loss of principal in the collateral account due to a decline in its per-unit mark-to-market value.
Bloomberg: – Gross loses world’s largest mutual fund title to Vanguard. – Bill Gross no longer runs the world’s largest mutual fund. Gross’s Pimco Total Return Fund (PTTRX) has shrunk by $37.5 billion since the start of this year, ending last month with $247.9 billion in assets, according to data provided by Pacific Investment Management Co. in Newport Beach, California, and compiled by Bloomberg. The Vanguard Total Stock Market Index Fund ended October with $251 billion.
WSJ: – 2013’s most popular bond ETF. – With interest rates still at uber-low levels, investors aren’t taking any chances. The list of the most popular exchange-traded bond funds this year is dominated by those with only limited interest-rate sensitivity.
WSJ: – Bond ETFs see some outflows. – This summer wasn’t exactly a hot one for U.S. bond exchange-traded funds, as investors yanked out more than 4% of the funds’ total assets amid rising interest rates.
Business Recorder: – Investors pour $54.2 billion into equity mutual funds. – Investors poured some $54.2 billion into all equity mutual funds and exchange-traded funds in October, the third-largest inflow on record, data from TrimTabs Investment Research showed on Sunday. All three of the largest monthly inflows into all equity funds have occurred this year, and this year”s inflow of $286 billion into all equity funds is the biggest since 2000, TrimTabs added.
Palm Beach Daily: – Tread cautiously with close-end bond funds. – If you’re seeking income in this lean interest rate environment, closed-end bond funds are being touted as an attractive deal. But these funds require careful scrutiny. Beware of quotations of “distribution rates,” which can run as high as 6 percent or more.
Washington Post: – Despite summertime worries about big losses for bond mutual funds, the declines have slowed. – A funny thing has happened since investors pulled more than $100 billion from bond mutual funds this summer as they worried that the 30-year run for bonds was coming to an end. Bond funds are no longer losing money, at least not recently. Almost every kind has made money over the last month.
Empiritrage: – Predictability in bond ETF returns. – Highlights that bond ETF premiums and discounts are persistent, and develops a trading strategy to take advantage of this persistence.
Zack’s: – 5 highest yielding Zacks #1 Ranked international bond mutual funds. – Investing in international bond funds is one of the best ways to balance losses incurred from US markets, since interest rate fluctuations differ from country to country. This is because they show little correlation with domestic equities and only moderate correlation with investment grade domestic debt. They also help in diversifying currency exposure and protecting assets against a long-term secular decline in the U.S. dollar. With their widely diversified holdings, mutual funds offer a secure route to investing in the international bond market.
FT Alphaville: – Tapering, dealer inventory and bond market liquidity. – The structure of the corporate bond market is much different than it was prior to QE.
— AnthonyValeri (@Anthony_Valeri) November 4, 2013
I've written the job is too big for him MT @BrentSnavely: Orr admits he does not have direct experience managing public safety for a city.
— Cate Long (@cate_long) November 4, 2013