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Despite analysts warning that the bottom could fall out of the surging bond market, bond prices have kept rising to unprecedented levels, with yields falling to unprecedented lows. It seems like investors are riding a Charlie and the Chocolate Factory elevator that just keeps going and going.
Bonds have been pushed on by the weak economy, low inflation and the Federal Reserve’s quantitative easing program. But all good things must come to an end, and there are signs that this particular elevator has in fact, gone as far as its going to go.
The yield of the 10-year Treasury note has risen to 2.7% from about 1.6% in early May, with many Treasury-bond funds having fallen in value. according to the WSJ, money managers are now beginning to sell funds holding Treasuries and other high-grade bonds.
The spark for this is the Fed’s plan to start trimming its $85 billion in monthly bond-buying stimulus, which analysts expect to begin between December and June. So, if the elevator has reached the top, how fast will it come down?
Some investors, think the Fed will manage to hold Treasury yields down by keeping interest rates low, limiting the damage. Others say longer-term Treasury yields could rise almost another percentage point by late 2014, sending bond prices crashing.
So how should you handle this event? Bill Gross says you should avoid long term Treasuries and stick to the front end of the yield curve, long term Treasures will be hit harder when rates rise.
BlackRock is urging clients to shift to “unconstrained” bond funds, also called “go-anywhere” funds.
And Ken Volpert of Vanguard has a different strategy: Buy more broad-based funds if prices decline. In a portfolio of 60% stocks and 40% bonds, if bonds decline to 34% of the holding, investors would rebalance by buying the now-cheaper bonds and returning them to 40%. The goal would be to buy assets at reduced prices and hold down fees.
Either way, don’t get left on the elevator as it falls, you want to get off on one of the upper floors if you can.
Todays Other Top Stories
Forbes: – Muni bond manager’s journal: Will your city go bankrupt? – Municipal bond investors are still weighing the implications of Detroit’s bankruptcy filing in July, especially as some pundits continue to warn that any municipality could be on the brink of financial disaster.
Fox Business: – Warnings for Puerto Rico. – BlackRock’s Head of Municipal Bonds Peter Hayes on whether Puerto Rico’s debt will be downgraded.
WSJ: – Bankrupt Alabama county kicks off bond sale. – Jefferson County, Ala., kicked off a $1.8 billion sewer-debt sale on Friday, offering up a small chunk of the bonds to individual investors in a deal that is critical for getting the cash-strapped county out of bankruptcy.
Daniel Irvin: – Is it crazy to buy these bonds? – Jefferson County, Alabama is exiting Chapter 9, in one of the more spectacular municipal financial disasters in recent history. As a part of the settlement, the county is issuing approximately $1.8 billion of new sewer revenue bonds (referred to as “warrants”, but essentially bonds) to refund outstanding (defaulted) bonds and pay other claims in the bankruptcy.
Bloomberg: – Los Angeles sells $380 million in water bonds. – The Los Angeles Water and Power Department plans a $380 million bond sale as part of a project that includes replacing aging pipes and hardening the nation’s largest municipal utility against earthquake damage.
Bloomberg: – Tisch sees rare opportunity for munis as funds dump bonds. – Loews Corp. Chief Executive Officer James Tisch said now is the time to buy municipal bonds after mutual fund investors dumped the securities for 25 straight weeks.
CNBC: – Damage to city budgets: Some was self-inflicted. – Five years after a once-in-a-lifetime global financial collapse and the Great Recession, many American cities now caught in a financial bind can rightly blame forces beyond their control.
Learn Bonds: – A conservative asset allocation for income-focused investors. – Over the next few weeks, we will release a series of articles geared toward investors who have built moderate-to-large nest eggs and are looking for general ideas about how to allocate their investments.
Frank Grossmann: – The ‘Sleep Well’ bond rotation strategy which has returned 15% per year since 2008. – The “Bond Rotation Strategy” is another tool you can use alongside our “Global Market Rotation Strategy” (GMRE), to maximize returns. These two strategies form the core of our investment strategies.
Income Investing: – Treasurys rise waiting Fed officials’ remarks; will bond rally end with a bang or whimper? – It’s a new week, but the same old hopes remain as investors look for further clarity about tapering.
About.com: – Floating rate Treasuries to debut on January 29. – After years of discussions, floating rate Treasuries are finally set to become a reality. On January 29, 2014, the Treasury will conduct its initial auction of floating-rate bonds with $10-$15 billion of two-year notes. The Wall St. Journal reports that this is the first new type of Treasury securities to hit the market since Treasury Inflation-Protected Securities (TIPS) were introduced in 1997.
BusinessWeek: – Pimco favors asian high-grade debt as low U.S. rates persist. – Pacific Investment Management Co., which runs the world’s biggest bond fund, sees value in high-grade notes sold by Asian companies as low U.S. interest rates persist.
Crain’s: – Junk-bond market starts to pile up. – Would you lend someone money if there was a better than even chance you would never get paid back? Of course you would—if you were today’s crazy junk-bond market.
HighYieldBonds.com: – Sidestep rate risk with this high yield bond ETF. – A look at the ProShares High Yield-Interest Rate Hedged ETF. Investors who are still looking for yields but are wary about rising rates can find that this ETF could fit the bill.
WSJ: – High-yield heyday has mostly passed. – High-yield bond funds are enjoying a bumper year, with returns above 20%. But while investors are pouring in billions of dollars, it is likely they have missed the best returns.
Forbes: – High yield bond volume hits $7B despite rising rate environment. – U.S. high yield bond issuance rebounded to $6.9 billion last week despite still-rising underlying Treasury Rates. Rather than test potentially higher rates in the future, issuers got to work last week, pricing $2.4 billion of offerings on Tuesday alone, after the long holiday weekend, according to LCD’s Matt Fuller.
Market Realist: – Why high-yield bonds act like equities. – As the economy recovers, the risk of default falls for small or highly levered companies that rely on debt financing. Higher growth means more productivity and higher sales, which allow companies to take on and service more debt.
FE Trustnet: – Is there any point in holding emerging market debt funds? – FE Trustnet looks at the pros and cons of investing in a sector that has taken a battering this year, asking the opinions of fund managers with differing views on the subject.
Money Marketing: – Emerging market funds dropped as tapering fears return. – Fund investors continued to sell emerging market stocks and bonds last week after strong US growth numbers increased the chance of the Fed starting to taper quantitative easing.
FT: – High spirits in Latin America help stem fears of leaner times. – Yes, investors threw a “taper tantrum” in May and yanked billions of dollars out of emerging markets on worries that the US Federal Reserve was about to end its tapering programme, effectively marking the beginning of a period of higher US interest rates.
ETF Trends: – Supply overhang could hamper EM bond ETF’s. – Exchange traded funds holding emerging markets sovereign bonds have struggled this year amid fears tapering of the Federal Reserve’s quantitative easing program would crimp developing markets dependent on external financing.
The Asset: – Cat bond market could more than double to USD50 billion by 2018. – The number of catastrophe or cat bonds outstanding could more than double from the current level of US$19 billion to US$50 billion by the end of 2018, according to a report from BNY Mellon.
Artemis: – No impact expected to cat bond fund from midwest tornadoes. – Yesterdays outbreak of severe thunderstorms, which triggered large hail, damaging winds and tornadoes across the U.S. midwest, is not expected to impact any of the catastrophe bond positions in Swiss catastrophe bond investment fund manager Plenum Investments portfolio.
Barron’s: – Basking in dovish testimony. – Sometimes it’s best to keep expectations simple. Bond markets tied themselves in knots last week as they awaited Janet Yellen’s confirmation hearing before the Senate Banking Committee as she aims to succeed Ben Bernanke as Federal Reserve chair. Bond-market strategists.
Reuters: – Loomis Sayles’ Fuss, a bond guru, still likes stocks. – A few days after the Red Sox won the baseball World Series, Loomis Sayles’ Dan Fuss was in New York, and the legendary Boston-based money manager couldn’t help but gloat a bit at the expense of Beantowns’s arch rivals the New York Yankees.
ETF Daily Finance: – Bond market gets slammed on Fed tapering flip-flop. – All those Wall Street flip-floppers — who did a 180-degree turn on their Federal Reserve tapering expectations only a few weeks earlier — got crushed. Now, they’re doing another 180 and coming around back to the view I’ve held all along. That view? Tapering is coming sooner than expected, Fed protests to the contrary be darned. And mark my words: Short-term rate hikes will then follow, also sooner than expected.
Bloomberg: – Funds rejecting Fed as reckless see loss in ’13. – Credit-fund managers who have attracted $45 billion this year expecting to profit from rising volatility in the bond markets are proving such strategies are little more than a Sisyphean task.
The Street: – The Fed and the exodus from bond ETFs. – The familiar pattern of May-June gloom for stocks only led to a 5% selloff in 2013. Bonds, however, witnessed a repricing that many had not seen since 1994. Intermediate-term Treasuries lost 7% to 8%. Munis fell more than 10%. Meanwhile, investors trampled emerging market bonds for 12% to 14%.
— Cate Long (@cate_long) November 18, 2013