Bill Gross: It’s Time to Lever Up and Today’s Other Top Stories

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Bill Gross, co-founder and CIO of PIMCO, has told investors now would be a good time to “lever up” by which he means making use of leverage to boost returns.

“It’s probably a good time to lever in a mild sort of way,” Gross, told Bloomberg on Thursday. For the next three to five years, investors should expect “the ability to borrow short and to lend long, much like banks do.”

The billionaire manager of the world’s biggest bond fund went on to say that it makes sense to borrow money in the current environment to magnify returns in the credit markets.

What Gross is essentially saying is, investors should be able to “borrow short” and “lend long,” implying that yields for shorter-dated Treasury bills should rise faster than yields on longer-date debt. In other words, the prices for shorter-dated Treasuries should fall faster than prices on longer-dated bonds.

So you should sell short-dated bonds and use those proceeds to buy long-dated bonds. Business Insider showed this chart from Wells Fargo which shows the firm’s expectations for bonds of varying maturities, which reflects the core idea Gross is talking about.


Todays Other Top Stories

Learn Bonds

LearnBonds: – McDonald’s : Is the market’s taste for it waning? – Nobody is bigger in the restaurant business than McDonald’s: it has more than 35,000 stores in 100 countries on six continents, and says its serves 70 million people a day. But if you’re an investor, you want to know about McDonald’s future, and, to be honest, it’s nothing like its 60-year history. Instead of remaining on a sure-fire growth trajectory, the fast food chain is battling to maintain market share and revenue growth, and is a value play.


Municipal Bonds

Truthdig: – Is the Fed preparing to asset-strip local governments? – In an inscrutable move that has alarmed state treasurers, the Federal Reserve, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, just changed the liquidity requirements for the nation’s largest banks. Municipal bonds, long considered safe liquid investments, have been eliminated from the list of high-quality liquid collateral assets (HQLA). Why this unprecedented move by U.S. regulators?

WSJ: – A Bond issuer’s creditworthiness is key. – There are no “rules of thumb” that would say general-obligation bonds are better or worse than municipal bonds with dedicated revenue streams, so either way you need to do some analysis of the underlying credit. Municipal bonds would generally carry a credit rating from one of the credit rating agencies so be sure to ask about that.

WSJ: – The surprising transaction costs of muni bonds. – In general, individual investors are unaware of the transaction costs they pay. That used to be a significant factor for investor’s purchases of equities. However, transaction costs of equities have declined dramatically over the past couple of decades. Municipal bonds, on the other hand, remain an extremely expensive investment to purchase.

Bloomberg: – Chicago at brink of swaps fee as bond ratings fall. – Chicago’s deteriorating credit quality has pushed taxpayers to the brink of paying almost $400 million to Wall Street banks on derivatives contracts that are backfiring.

NY Times: – Puerto Rico finds it has new friends in hedge funds. – Forget, just for a moment, what you have heard about sharp-elbowed hedge funds, seizing Navy ships from deadbeat nations or pushing for federal investigations into the companies they are betting against.

WSJ: – When a muni bond is right for you. –  A few years ago, Brad Barber and I did a study in which we looked at which assets investors tended to put in taxable and tax-deferred accounts. We were happy to find that very few investors make the mistake of holding municipal bonds in tax-deferred accounts. But I suspect that fewer investors realize that municipal bonds are generally only appropriate investments for people with the highest marginal tax rates since the after-tax yield on these bonds is highest for these people.


Bond Market

Business Spectator: – Banker warns of ’94-style bond crash. – One of Australia’s most respected bankers has warned of a 1994-style bond crash as central banks inflate asset bubbles around the world.

Businessweek: – Fed stimulus has led to $1 trillion bond rally, confounding critics. – If you decided not to buy and hold U.S. Treasuries because you listened to all those academics, billionaires, and politicians who have denounced Federal Reserve monetary policy since the financial crisis, you missed a chance to share in $1 trillion of investment returns.

Income Investing: – Secured bonds are more likely to end up distressed. – High-yield market guru Martin Fridson’s latest statistical deep dive this week reveals a strange paradox: secured bonds are much more likely than unsecured bonds to end up trading at distressed levels.


High Yield Bonds

Bloomberg: – Junk-bond offerings struggle as buyers return to fleeing. – Junk-bond buyers have indigestion again. Speculative-grade borrowers from Jupiter Resources Ltd., an energy firm backed by Apollo Global Management LLC, to AK Steel Holding Corp. had to sweeten terms yesterday to sell at least $8.7 billion of debt. The offerings struggled as investors pulled $766 million from funds that buy the bonds in the past week.

Forbes: – High yield bond funds see $776M investor cash withdrawal. – Retail-cash outflows from U.S. high-yield funds expanded to $766 million in the week ended Sept. 10, from just $198 million last week, according to Lipper. The influence of ETFs looms large, at 58% of the sum, or an outflow of $447 million this past week, up from 37% the week prior.

Reuters: – High-yield bond funds worldwide post $2 bln outflows in latest week. – Investors worldwide pulled $2 billion out of high-yield bond funds in the week ended Sept. 10, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

IFR Asia: – Heavy pipeline weighs on US high-yield market. – A bulging pipeline is having a knock-on effect on pricing in the US high-yield market, with issuers paying at least 25bp more than they would have done a couple of weeks ago to sell bonds.


Emerging Markets

Investopedia: – Invest in emerging market bonds with these ETFs. – As many investors are aware, the current interest rate environment in the U.S. has been forcing fixed income investors to broaden their horizons when searching for yield. One area that has been gaining traction is emerging market bonds. Currently, there are several interesting candidates to choose from, but unfortunately the lack of coverage makes finding them a difficult task. We share with you several popular emerging market bond ETFs that could be worth a closer look.

Citywire: – EMD stronger now after ‘taper tantrum’ trauma, says UBP chief. – The massive volatility caused by the so-called ‘taper tantrum’ has finally run its course and emerging market debt will be stronger because of it, UBP’s Denis Girault has said.


Investment Strategy

Potrero View: – Investors should be wary of long-term bonds. – It’s a bad time to own or buy bonds, such as fixed coupon bonds with mid- to long-term maturities, which include the most common type of bonds, U.S. Government Treasuries. Why should bonds be avoided? Mainly because there’s a high probability interest rates will rise over the next couple of years.

MarketWatch: – Bond fund investors should lower duration. – If the decline in bonds last summer put a serious dent in your portfolio, it’s time to circle the wagons so that future interest rate leaps won’t leave you scrambling to make changes at the most inopportune time.

Intelligent Investing: – Get back in the market with these leading funds and ETFs. – I encourage investors to get invested and stay invested–and one of the simplest ways to stay invested through up and down markets is to hold a portfolio that includes both stock and bond funds.


Bond Funds

Morningstar: – The still-sorry state of bond-fund disclosure. – It’s five years after the crisis, and bond funds still badly need to improve how they tell shareholders what they own.

USA Today: – Investing: Reits offer high yields, but high prices. – If you’ve ever owned rental real estate, you know that the problems can outweigh the benefits. There’s taxes and building inspectors. All of which may be one reason why real estate investment trusts, or REITs, are so popular. They aren’t cheap, but they’re a good way to get some income in these yield-starved days — and a good portfolio diversifier as well.


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