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With the debt ceiling cloud currently hanging over markets, you’d be forgiven for thinking that the U.S. Treasury market would be taking a hit. But nothing could be further from the truth. Treasuries gained again Monday, with the ten-year note showing 9/32 of price gain to yield 2.619%, and the 30-year bond up 21/32 to yield 3.694%, according to data from Tradeweb.
So why are Treasuries proving so resilient? Bloomberg’s Susanne Walker writes today that big bond-fund managers are finding government bonds safer, not riskier, largely because they don’t believe the Fed will default on their debts:
“BlackRock Inc. (BLK) Chairman and Chief Executive Officer Laurence D. Fink and Pacific Investment Management Co. Co-Chief Investment Officer Bill Gross, who lead the world’s biggest bond firms, dismiss the possibility of a default after the first government shutdown in 17 years as House Republicans failed to agree on a budget with Senate Democrats and President Barack Obama. With the closures shaving at least 0.1 percent off economic growth each week, Fed policy makers said they will probably keep buying $85 billion a month of bonds.”
And Mark MacQueen, a partner and money manager at Sage Advisory Services Ltd., said:
“The dysfunction in Washington just makes the Fed more likely to be supportive of the market. We should stick to the underlying economic fundamentals and not worry about 72 hours in Washington. The real fear of a major rate increase is diminishing as long as this nonsense continues.”
So even if congress doesn’t get its act together to end the debt crisis, both Gross and Fink think that the Fed will still be able to finance its debt, simply by re appropriating its funds in the short term.
Todays Other Top Stories
New York Times: – Municipal bonds, stung again. – “SELL IN MAY,” the stock-market adage, would have served municipal bond investors well this year. Those who stayed in the market faced sharp losses.
Bloomberg: – Swaps live on as battery park retires auction debt. – The agency that runs Battery Park City, the Manhattan neighborhood that houses Goldman Sachs Group Inc. (GS)’s headquarters, is borrowing almost $1 billion in part to refinance auction-rate debt, five years after the $330 billion market collapsed.
WSJ: – Puerto Rico debt troubles regulators. – U.S. government officials are becoming more concerned about Puerto Rico’s deepening economic and financial woes—and their risks for American investors.
Cate Long: – Infant Moscow muni bond market resembles U.S. – In its first municipal bond issue in recent years, Moscow managed to sell only 35 percent of the securities on offer, raising 6.85 billion rubles ($212 million).
Learn Bonds: – What’s so scary about long-term bonds? – The way long-term bonds are frequently discussed by the media, some investors might think they are a type of financial-markets disease, to be avoided at all costs. I’ve never quite understood this. While I don’t think a 100% allocation to long-term bonds is prudent, neither do I think a 0% allocation is a good idea. In this article, I would like to address four reasons for avoiding long-term bonds that you may have come across at one time or another.
WSJ: – A ‘perfect storm’ hits TIPS funds. – Owners of inflation-protected-bond funds have learned a painful lesson this year, and it’s one well-heeded by all investors: Understand how an investment will perform in unlikely scenarios, not just likely ones.
Rick Ferri: Tips On TIPS. – How much of an allocation should he have to Treasury Inflation Protected Securities (TIPS)?
Bloomberg: – A U.S. Default seen as catastrophe dwarfing Lehman’s fall. – Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.
Minyanville: – Fear and greed in corporate bond ETFs. – Is it possible for risk-averse investors to flee the allegedly safer investment-grade index at the same time that risk-seeking investors are fleeing into high-yield index?
Financial News: – Junk bonds push the needle for buyout firms. – The junk bond market was once used by private equity to add a little bit more leverage to transactions. But, nowadays, about half of all debt financings for buyouts come from high yield. Issuance is at a record high.
Financial Advisor: – High-Yield investors moving to shorter duration, says BlackRock strategist. – Investors who hold high-yield bonds are moving their investments to those with shorter durations, based on concerns that interest rates will eventually move higher, said a BlackRock strategist.
Barron’s: – EM funds sell-offs lack momentum as retail exit slowed and institutional money trickled in. – For the week ending October 2, investors withdraw money from emerging markets equity and bond funds again, snapping the nascent inflow seen after the Fed’s September 18 meeting when it decided to postpone QE tapering.
Think Advisor: – Abandon bonds? not so fast. – Here’s a challenge: See if you can find any thoughtful, successful, experienced and honest investors who think that bonds are an attractive place for money. Is there a doubt in anyone’s mind that bonds are bad investments today? How many luminaries do I need to quote? Warren Buffett? “Now is a terrible time to buy bonds.” Jeremy Grantham? “We are literally running out of superlatives to describe how much we hate bonds.” Or perhaps Jim Grant? “The Fed has somehow managed to take the income out of fixed income and the yield out of high yield.”
IndexUniverse: – ProShares on hedging bond-duration risk. – Steve Sachs, head of capital markets for ProShares, thinks an ETF strategy that hedges duration risk is smart. He thinks it’s so smart that he believes it has a place in both domestic and international markets. The only thing holding investors back from reaping the benefits of a strategy like the ProShares High Yield–Interest Rate Hedged fund is an education gap. He says ProShares is an ETF issuer known for ultra-niche, alternative strategies. Sachs sat down with IndexUniverse staff writer Hannah Tool.
Bloomberg: – BlackRock’s Fink is captivated by Pimco favorite Mexico. – For Laurence D. Fink, who oversees $3.86 trillion as BlackRock Inc. (BLK)’s chief executive officer, there’s no better place to invest than Mexico.
Barron’s: – How to navigate the bond market. – Interest rates are going to rise. Can unconstrained bond funds make falling off the cliff more of a gentle tumble? Here are four Barron’s likes.
$CS: A QE of ~$40b of MBS per month will ramp up the Fed's purchases from 68% to 85% of net new production
— David Schawel (@DavidSchawel) October 7, 2013