Bill Gross – Focus on Front-End Yields and Today’s Other Top Stories

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It’s the beginning of the month again and that means two things, the rent is due and Bill Gross is out with his monthly outlook. Unlike most investment commentary, Gross likes to liven-up his monthly missive by giving us a little look behind the curtain.

Each month we get to learn a little more about the man. We already know he’s an avid collector of stamps, has a love for military strategy and hates baseball. This month we learn of his hatred for crows.

“They screech, they jabber, they complain from the treetops and then once on the ground they hop, hop, hop all over the street looking for garbage.” Says Gross.

As usual we’re left wondering what all this has to do with bonds. This is where I have to come up with a tenuous link to pull it all together. And here, I’ve found one. In Greek mythology, the god Apollo became so enraged when the crow exposed his lover Coronis’ tryst with a mortal, he turned the crow’s feathers from white to black.

Bernanke did the opposite when he decided not to taper. He turned the Feds monetary stimulus program from black, “bad for bonds”, to white, “good for bonds”. Much the same thing is happening to Bernanke’s beard.

The trouble is, Bernanke or Yellen (Whoever holds the Fed’s mace) can change it back at any moment. So how do you fight against the power of Greek Gods?

Gross says:

“In betting on a lower policy rate than now priced into markets, a bond investor should expect a certain pastoral quietude in future years, much like that grazing cow, I suppose. Not that exciting, but what the hay, it’s an existence! Portfolios should emphasize front end maturity positions that are stabilized by the Fed’s forward guidance as well as volatility sales explicitly priced in 30-year agency mortgages. Because of the inflationary intention of low policy rates, TIPS (Treasury Inflation-Protected Securities) and the avoidance of anything compositely longer than say 7–10 years of maturity should be favored (long liability structures such as pension funds excepted). PIMCO believes that such a modeled portfolio could likely return 4% in future years.”

“A bond investor’s focus must simplistically be this: In this new age where short-term yields cannot go lower, let the yield curve, volatility and acceptably priced credit spreads be your North Star. Duration and its empowering carry are fading from the nighttime sky, especially for 10- and 30-year maturities. Mother Nature nor Mother Market cares not a whit for your losses nor your hoped for double-digit return from an equity/bond portfolio that is priced for much less. Be a contented cow, not a voracious crow, and graze wisely with increasing certainty that the Fed and its forward guidance is your best bet for survival.”


Todays Other Top Stories


Municipal Bonds

Forbes: – The investor safety net is fraying. – Safe havens for investors are downright scary these days. Since Detroit’s record bankruptcy in July, investors have been more skittish than ever about municipal bonds, once a strong strand in the safety net of boring investments for Americans investors.

Bloomberg: – Cheapest state costs showing resilience to shutdown. – The biggest rally in U.S. state bonds in two years shows investors are betting the governments will weather the federal shutdown and any failure by lawmakers to raise the nation’s debt ceiling.

Reuters: – U.S. municipal bond sales so far in 2013 slip 13.6%. – U.S. municipal bond sales totaled $237.8 billion in the first nine months of 2013, down 13.6 percent from the same period in 2012, according to Thomson Reuters data released on Tuesday.

Income Investing: – Munis face ‘limited impact’ from shutdown. – Bond markets remain muted in their response to the government shutdown today, with Treasury prices only slightly lower on the day. Nuveen Asset Management notes that markets historically have not responded dramatically to government shutdowns, with that pattern holding today as Treasury yields have remained in a contained range.

SSRN: – Advance refunding of municipal bonds destroys value. – Municipal bonds are often “advance refunded.” Bonds that are not yet callable are defeased by creating a trust that pays the interest up to the call date, and pays the call price. New debt, generally at lower interest rates, is issued to fund the trust. Issuing new securities generally has zero net present value. In this case, however, value is destroyed for the issuer through the pre-commitment to call.


Treasury Bonds

Learn Bonds: – The debt ceiling time bomb no one is talking about. – On June 28, 2011 then Secretary of the Treasury Timothy Geithner wrote to then U.S. Senator Jim DeMint. The overarching theme of the letter dealt with the idea of prioritizing payments should the debt ceiling not be raised. But there is something else in the letter that was not covered in the press back in 2011 and something that I have yet to see covered today as it relates to the dangers of not raising the debt ceiling.

IndexUniverse: – Bogle: Swap Treasurys for corporates. – Bogle held forth on a number of subjects, including his ongoing suspicions that ETFs tempt investors into making decisions that hurt them in the long haul, and his view that aggregate bond indexes have too much Treasury debt and not enough corporate credits.


Corporate Bonds

Bloomberg: – BofA says bonds to beat stocks in debt gridlock. – Strategists from Bank of America Corp. to Wells Fargo & Co. predict dollar-denominated corporate bonds will outperform stocks this month if political gridlock persists with the government partially shut down this week.



BusinessWeek: – Trading in junk bonds declines most since 2008. – Junk-bond trading in the U.S. has fallen the most since 2008 as the Federal Reserve keeps investors guessing on when it will slow bond purchases that bolstered demand for the debt.


Emerging Markets

Actuarial Post: – Focus on Emerging Market corporate debt. – Well-funded emerging markets (EM) benefited dramatically from the West’s financial crisis. Today EM corporate bonds have developed from a niche asset class to a globally acknowledged financing instrument. However, recent signs of slowing growth in EM geographies have called into question this asset class’ sustainability- are these concerns valid?

FT Beyond Brics: – EM bonds: a record September. – Few expected September to be a record month for sovereign debt auctions. Ever since the US Federal Reserve first hinted in May at a possible “tapering” of its massive bond buying programme, emerging market countries have found borrowing much tougher and more expensive. Borrowing costs soared and issuance shrunk accordingly.


Catastrophe Bonds

Reuters: – UK won’t intervene in catastrophe bond market for now. – British regulators see no case to intervene to stop a wave of money moving into insurance-linked markets such as catastrophe bonds, saying that the development should not be overstated.


Bond Funds

Business Insider: – Investors withdrew billions from Jeff Gundlach’s bond fund because of the taper threat. – Clients pulled $2.1 billion from Jeff Gundlach’s $35.1 fund in September, Bloomberg’s Alexis Leondis reports.

ETF Trends: – ETFs help investors navigate changing fixed-income landscape. – Investors are worried about income generation and volatility in the equities market. However, ETFs can help investors diversify and augment yields in their portfolios.

Zacks: – Inside the new iShares ultra short term bond ETF. – Short-term bond funds have gained immense popularity over the past couple of months in anticipation of rising interest rates should the Fed start tapering. In order to make the most of the growing demand for these funds, iShares launched iShares Short Maturity Bond ETF. The new fund would provide investors’ another option to play in the fixed income space seeking broad exposure to the ultra-short term bonds while protecting them from rising interest rates.

IndexUniverse: – The 3 biggest lies about bond ETFs. – Fixed income remains one of the fastest-growing parts of the ETF market. With some $230 billion in 246 ETFs, investors have voted with their feet, and for good reason: Bond ETFs provide liquid, easy-access, generally tax-efficient exposure to the bond market.


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