Big is Not Beautiful When it Comes to Bond Funds and More Top Stories

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In a sign of rising concern over the systemic risks from illiquid bond markets, some investment consultants are starting to steer clients away from the large mega funds like PIMCO’s Total Return (TLT), favouring smaller managers instead. Amid concerns that investors in larger funds risk being stranded in the event of heavy redemptions.

The lack of trading in bonds, especially corporate bonds, is what managers are worried about. With Banks no longer willing to commit the capital that would allow them to hold sufficient supply of bonds to facilitate customer trading the value of corporate bonds held on bank balance sheets has fallen by 82% since 2007 according to consultancy GreySpark.

Late last month, the FCA issued a notice to investors warning that bond funds, while offering “limited risk to capital”, could struggle to sell their holdings in “extreme market conditions”.

The FCA noted: “This is because there is low trading activity in the markets for many of the bonds held by these funds – and the market for underlying bonds has shrunk in recent years.”

Alex Thompson, principal in Mercer’s fixed income manager research team, added: “We look at the overall level of assets that firms manage… In an adverse environment, are they going to be able to move and get out of the positions? It depends on the style of the manager.”

Consultants Towers Watson, which has assets under advisory of more than $2 trillion worldwide, is close to completing a review of fixed income managers and Chris Redmond, its global head of bond manager research, said it would mean “favouring smaller managers” in some instances.

He said: “We are applying a slightly higher bar [and] thinking about size, style and the new liquidity regime. People who have a strategy that is reliant on strong liquidity and have been lulled into a false sense of security will suffer when the market changes.”

“It’s down to concerns over liquidity specifically, but we certainly have raised concerns about where credit markets are in general.”


Todays Other Top Stories

Learn Bonds

LearnBonds: – One thing you need to know about the Fed and inflation. – You may have noticed that the prices of things you buy seem to be getting a whole lot more expensive lately. From food to gasoline to a whole host of other things people tend to rely on, the relentless push higher in the prices of things people need seems to know no end. It’s borderline insulting that the Fed’s monetary policy is one that intentionally devalues each and every person’s economic reward (money) for the labor they provide to their employers and/or customers.


Municipal Bonds

MoneyNews: – Municipal bond sales fall steeply in July from prior year. – Issuance of U.S. municipal bonds fell steeply in July, with sales for the first seven months of 2014 running 15.4 percent below the same period last year, according to Thomson Reuters data released on Friday.

The Tribune: – Fixing Grover Beach’s potholed roads: Decades of struggle. –  City officials are asking voters to approve a $48 million bond to fund paving.

Bloomberg: – Rhode Island refunds tobacco bonds as rally sputters. – Rhode Island is selling $594 million in debt backed by tobacco-company payments as the segment is losing some luster while it beats the $3.7 trillion municipal market this year.

Bloomberg: – Detroit gateway seizes chance on record airport-bond gain. – The agency that runs the main airport serving bankrupt Detroit is set to offer $107 million of debt as airport bonds extend an unprecedented winning streak relative to the $3.7 trillion municipal market.


Bond Market

Forbes: – The Week Ahead: Will bond fund holders be singing the blues? – The stock market finally got hit last with its first heavy round of selling since early February. The Dow Industrials gave up its gains for the year. It had been lagging the other market averages like the S&P 500 and Nasdaq Composite all year.

Trustnet: – The nimble alternatives to the multi-billion pound bond funds. – With more investors becoming concerned about potential illiquidity in the corporate bond market, we ask the experts which nimble bond funds they recommend.

WSJ: – Reduced liquidity in bond markets concerns portfolio managers. – Selling pressure could overwhelm market once fed starts to raise rates.


Treasury Bonds

Investing.com: – 10-year Treasury speculators decrease bets for third consecutive week. – Large Speculators net bearish positions fell to a total of just -5,806 contracts.

Businessweek: – U.S. yield curve steepens as bets decline on quicker rate boosts. – The difference between yields on Treasury five-year notes and 30-year (USGG30YR) bonds reached the widest in two weeks as investors cut bets on how quickly the Federal Reserve will raise interest rates.


Investment Grade Bonds

FT: – Doomsayers distrust ‘sexy part of the market’. – According to the Barclays Aggregate index, fixed income investors are now getting yields of less than 3 per cent on a typical US investment-grade corporate bond, and barely 100 basis points of yield over and above risk-free Treasury rates. That is great for borrowers, but bond investors may come to rue not having built in any cushion for increased credit risk.


High Yield Bonds

Bloomberg: – Falling junk-bond ETFs show concern after bank retreat. – It’s been an ugly week for U.S. high-yield bonds, the worst in more than a year. As investors fled, they turned to the easiest exits and pulled more than $1 billion from exchange-traded funds, according to data compiled by Bloomberg. With Wall Street banks generally devoting less capital to trading, there wasn’t much of a buffer on the other side to prop up values.

WSJ: – Junk bonds sink on fears rally will end as economy picks up. – Investors retreated from risky corporate debt on Thursday, sending prices tumbling and deepening fears of an end to a long rally in junk bonds.

WSJ: – Junk-debt liquidity concerns bring sales. – A shakeout in the junk-bond market is drawing only cautious interest from bargain-hunters, underscoring investor fears that many once-hot securities could prove hard to sell in an increasingly difficult trading environment.

FT: – Investors blow froth off junk bond market. – The push into junk bonds has sparked concerns that valuations are stretched and that the inevitable exit from what has been a historic bull run is likely to be messy.

CNBC: – Junk bonds signaling cracks in bull market? – Jeremy Siegel, University of Pennsylvania finance professor, explains why he still sees a buying opportunity in the markets.

Business Insider: – Check out the massive outflows from high-yield bond funds. – People won’t stop talking about high-yield bonds, and this chart from Alain Bokobza and his team at Societe Generale shows exactly why: high-yield investors are now running for the exits.

USA Today: – These junk funds got trashed last week. – A number of open-ended funds got trashed last week as well, raising worries investors will continue to flee. The biggest worry: In a full-blown junk-bond sell-off, managers must sell their best bonds first, because those are the only ones buyers will bid on. After the sell-off, the portfolio will just be the junk that can’t be sold.


Emerging Markets

Telegraph: – Are problems emerging for 2014’s star performers? – The emerging markets may have performed better than expected, but can they compete when the US economy is firing on all cylinders, asks Tom Stevenson.

CIO: – Emerging market inflows surge to 18 month high. – Investors’ appetite for emerging markets has surged to their highest point since the first quarter of last year, data has shown.


Investment Strategy

Investorplace: – 8 ETFs to take advantage of a Fed stimulus pullback. – Interest rates could find renewed life, and if so, you’ll want to be in the right position to profit.


Bond Funds

Reuters: – Gundlach’s DoubleLine Funds see 6th straight month of inflows. – Jeffrey Gundlach’s DoubleLine Funds had net inflows of $603 million in July, with its flagship DoubleLine Total Return Bond Fund attracting net inflows of $375 million.

Business Recorder: – BAML to pull CoCos from global bond indexes. – Fears of a selloff in European bank CoCos were ignited on Thursday when Bank of America Merrill Lynch said it was removing US $62.6bn of face value European bank Additional Tier 1s from its corporate bond indices. “All contingent capital securities (CoCos) will be removed from the global high-grade corporate and high-yield corporate indices effective September 30,” it said in a note. “In the interim we will not add any new CoCos to these indices.”

CNBC: – Why ETFs may be the biggest bond worry. – Declining credit standards among bond issuers may be worrying analysts, but the papers’ buyers, especially exchange traded funds (ETFs), could also pose big market risks if liquidity dries up.


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