Bond Dealers Caught Short Betting on Treasuries and Today’s Other Top Stories

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Bloomberg reports that bond dealers from many of Wall Street’s biggest banks began wagering that Treasuries would selloff last month for the first time since 2011, after Fed Chair Janet Yellen told the market that she expects interest rates to rise sooner than had been anticipated.

But the strategy went sour when Yellen signaled she wasn’t in a rush to lift interest rates, following the bank’s March 19 meeting.

Yellen’s comments caused Treasuries to whipsaw as investors factored in forecasts for higher borrowing costs as lackluster job growth and emerging-market turmoil pushed yields toward 2014 lows.

After surging to a 29-month high of 3.05% at the start of the year, yields on the 10-year note have since declined to 2.7% at the close of play Monday.

This has resulted in many Wall Street firms suffering losses after placing $5.2 billion of wagers in March that Treasuries would fall, the first time they had net short positions on government debt since September 2011, according to data from the Fed.

“We had that big selloff and the dealers got short then, and then we turned around and the Fed says, ‘Whoa, whoa, whoa: it’s lower for longer again,’” MacQueen said in an April 15 telephone interview. “The dealers are really worried here. You get really punished if you take a lot of risk.”

You can read the full story here.


Todays Other Top Stories

Municipal Bonds

Reuters: – New Jersey leads $8 bln of U.S. muni bond sales next week. – U.S. municipal bond sales will increase to $8 billion next week, led by a $1.16 billion deal from New Jersey’s Economic Development Authority that will help the recently-downgraded state save money on its strained budget.

Reuters: – U.S. Treasury plans new unit to monitor municipal market. – The U.S. Treasury Department is forming a unit on state and local finance to coordinate its responses to developments in the country’s $3.7 trillion municipal bond market, a Treasury spokesperson said on Thursday.

Investing: – Top ranked muni bond ETF in focus. – The U.S. municipal bond market, which saw volatile trading in 2013, seems to be finally having its good days. Munis have recovered some of the losses from last year and are finally trading in the green.

Bloomberg: – California yields fall amid reserve redraft. – California’s borrowing costs have fallen to the lowest level in three months, with Governor Jerry Brown calling a special legislative session to alter plans for a budget reserve just as the most indebted U.S. state offers $750 million of bonds.


Treasury Bonds

LearnBonds: – Why does the Fed want to make life more expensive? – Economists should consider honestly debating the merits of the inflationary policies that have left millions of Americans behind, and think about whether changes to those policies might provide more stability over the long run.

ETF Trends: – Don’t bet on Treasuries repeating Q1 performance. – U.S. Treasury debt was something of a surprise performance winner in the first three-and-a-half months of 2014, beating U.S. equities, a performance investors should not necessarily count on being repeated, according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.

The Street: – ‘Fast money’ recap: Watch where bonds are headed. – On CNBC’s “Fast Money” TV show, Guy Adami, managing director of stockmonster.com, pointed out the big reversal in the iShares 20+ Year Treasury Bond ETF (TLT) on Thursday, signaling bond yields may be headed higher. He added that next week’s action in the stock market could be pivotal in deciding its next big move.

WSJ: – Treasury bonds edge higher after last week’s pullback. – Treasury bond prices edged higher on Monday as some investors took advantage of last week’s selling to buy U.S. government securities at cheaper levels.


High Yield

Market Realist: – Why investment-grade bond issuance last week beat expectations. – Investors willing to take a little higher risk than what they find in Treasuries, if they’re in search of higher returns, can consider investing in investment-grade corporate bonds. In addition to interest rate risk, which also affects Treasury securities, corporate bonds are also subject to credit risk, as their bonds aren’t guaranteed by the U.S. government.

Invesco: – Why today’s environment favors active high-yield strategies. – Fixed income investors are looking for ways to prepare their portfolios for rising interest rates. While bond prices generally fall when rates rise, history shows that high-yield bonds have typically held up well in rising rate environments.

ETF Trends: – Top 3 high yield ETFs every investor should own. – One of the best investments for earning high yields and diversifying your portfolio are ETFs. Like mutual funds, ETFs often invest in more than 100 securities. That means that ETF investors immediately get diversified exposure to all of the investments in the fund. Plus, these funds typically charge lower fees than mutual funds.

Barron’s: – Goldman unconstrained fund pares junk-bond exposure. – Jonathan Beinner, manager of the $21.3 billion Goldman Sachs Strategic Income fund(GSZAX), is another one of the fund managers I quote in my latest Current Yield column who are growing increasingly bearish on junk bonds.


Emerging Markets

FT: – Emerging markets repent of ‘original sin’. – A decade ago, economists often fretted about the so-called “original sin” that plagued emerging markets. During the 1980s and 1990s, countries such as South Korea and Argentina issued vast quantities of bonds denominated in non-domestic, “hard” currencies such as the dollar.

ETF Trends: –  Emerging market bond ETFs: Rising credit risk. – Emerging market debt and bond-related exchange traded funds offer relatively attractive yields, but investors could see higher credit risk in so-called trouble spots as growth slows and rates rise.


Investment Strategy

John Dowdee: – Constructing a high-income, tax-exempt portfolio with CEFs. – A portfolio of municipal bond CEFs is a compelling way to receive high tax-exempt income.


Bond Funds

ValueWalk: – PIMCO bond funds downgraded while commodity program boosted. – As a sign of the times, two of Pimco’s bond funds have been downgraded by Morningstar while its non-bond related fund, the actively managed Commodity Plus Strategy, received an upgrade.

Reuters: – DoubleLine hires PIMCO exec for new bond product team. – DoubleLine Capital, the bond management firm run by Jeffrey Gundlach, on Monday said it had hired an executive from rival Pimco to run a new unit focused on developing new investment products and new lines of business, particularly outside the United States.

Investment News: – Bond ETFs posted a good start to 2014, though March showed its lion’s side. – The first quarter of 2014 saw equities change course from the torrid returns they posted last year, and rising interest rates in 2013 gave way to falling yields for 2014 — so far. Starting the new year, market observers generally expected a correction to equity prices at some point, although unsettling headlines from key emerging markets such as China and Brazil and disappointing economic activity at home accelerated the softening.

ETF Trends: – Some new ETFs quickly find firm footing. – This year’s pace of new product launches from issuers of exchange traded funds is decent, though not breathtaking and that could be a sign that sponsors are becoming more selective about the concepts that make it from the drawing board to launch.

FT: – U.S. banks post worst start to year for bond trading since 2008. – U.S. banks reported their worst start to the year in fixed-income trading since the financial crisis, raising new questions about whether Wall Street’s profit engine can ever roar back to life.

On Wall Street: – Taking a second look at unconstrained bond funds. – Following a three decades-long bull market in bonds, ever increasing numbers of retirees are seeking additional income from conservatively positioned portfolios. This has led to an increasing number of fixed income fund options with a “go-anywhere” philosophy.

NASDAQ: – Vanguard total bond market ETF experiences big inflow. – Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel , one standout is the Vanguard Total Bond Market ETF (Symbol: BND) where we have detected an approximate $146.2 million dollar inflow — that’s a 0.8% increase week over week in outstanding units.


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