Over the past few years, most economists and interest rate forecasters have become increasingly convinced that rates have nowhere to go but up.
However, most of these predictions have proved wrong as rates have continued to trend lower.
Of course not everybody called it wrong. DoubleLine Funds’ Jeffrey Gundlach and HSBC’s Steven Major have been among the minority that has been on the right side of this trade. And both expect rates to keep falling in 2015.
Earlier in the week, Ed Yardeni highlighted nine reasons why U.S. rates could fall: “Bond shortage, Portfolio rebalancing, Bond fund inflows, Fed still buying, Yields plunging in Europe, Inflation remains subdued, Global growth is slow, Ultra-easy monetary policy, and Safe Havens. These factors continue to drive yields lower. They also make stocks, especially dividend-yielding ones, look more attractive.”
But despite the gloom hanging over world markets, economists are still convinced that rates are heading higher. In a recent survey by Bloomberg, most respondents thought yields on the 10-year note would end 2015 at 3.01%. Jeffrey Gundlach highlighted those calls in his latest presentation.
Unless things pick up pretty soon, that call is going to be a disaster.
Todays Other Top Stories
Learn Bonds: – India cuts interest rate to boost sluggish economy. –RBI, India’s central bank, cut the repo rate by 0.25 percent to 7.75 % on January 15. Stocks and bonds rallied immediately after the announcement.
Reuters: – U.S. muni bond funds post $688.5 million in inflows. – U.S. municipal bond funds reported $688.5 million of net inflows in the week ended Jan. 14, about half the $1.3 billion in inflows the previous week, according to data released by Lipper on Thursday.
Intelligent Investing: – Diehard muni investors reaped big rewards in 2014, what’s next? – Municipal bond investors have faced several rounds of market volatility in the past year, but they’ve been well rewarded for staying the course through headline events like Puerto Rico’s debt crisis, as muni bonds outperformed their taxable peers. So what’s next?
Vetr.com: – Diversify with a cheap, broad munis bond ETF. – Fixed-income investors may be paying more than necessary when purchasing individual municipal debt securities. On the other hand, people can use munis exchange traded funds for a cheap way to access the market.
NY Times: – Obama proposes tapping private investors to fund infrastructure projects. – The White House unveiled a tax proposal and administrative actions on Friday that are aimed at promoting private investment in roads, bridges, water systems and broadband networks.
Bloomberg: – Puerto Rico may get about $2 billion from petroleum-tax debt. – Puerto Rico lawmakers are set to pass changes to a borrowing plan that would raise about $2 billion by selling bonds backed by petroleum taxes, said a legislator from the island.
Bloomberg: – Munis still cheap as best rally in a year can’t match Treasuries. – The $3.6 trillion municipal market is rallying the most in 12 months. It still looks cheap compared with Treasuries.
ETF Trends: – Bond market surprises and lessons learned. – What a difference a year makes when it comes to expectations versus reality. Case in point: at the end of 2013, most interest rate strategists expected 10 year Treasury rates to rise to the 3.5% to 4.5% range over the course of the year. Clearly they were mistaken. Instead, bond yields surprised many investors by falling instead of rising.
Reuters: – Goldman Sachs profit hit by weak fixed-income trading. – Goldman Sachs Group Inc reported a 7 percent drop in fourth-quarter profit as an unexpected bout of market volatility in December hit its bond-trading business.
WSJ: – U.S. Government bond yields fall for fifth straight session. – (Subscription) A major policy shift from Switzerland’s central bank on Thursday sent ripples through the global markets, pushing many yields in the developed world to fresh lows.
MarketWatch: – 10-year Treasury yield falls to lowest level since may 2013. – Treasurys tumbled badly Thursday, highlighted by the 30-year yield falling to a fresh all-time low for the second time this week, and the 10-year yield stumbling to its lowest level since May 2013, after the Swiss National Bank rocked global markets.
High Yield Bonds
Fast FT: – Respite for junk bond market as investors pile in. – The junk bond market snapped a six-week streak of outflows. Investors poured $880m into mutual funds and exchange traded funds investing in the securities in the week ending January 14, according to new data from Lipper.
Market Realist: – The effects of ultra-low bond yields on utilities. – In the search for yield, Russ believes investors have pushed U.S. utilities’ prices too high. His advice: Don’t overpay for yield.
Chartered Club: – Asset bubble ready to explode because of U.S. Junk Bonds. – Many debates are humming around about the present slow down and its birth to the biggest recession of the world economy in the coming days. The biggest question is that how this child of recession would born and its long term aftershocks on the global economy. In my research I have been doing experiment where I have found that recession would happen from 2 ways.
Reuters: – Junk-rated energy companies scramble for financing. – US high-yield energy companies are scrambling to line up billions of dollars of emergency financing ahead of what is likely to be a brutal round of cuts to their revolving loans.
Emerging Market Bonds
Bloomberg: – Short sellers now taking aim at emerging-market bonds. – The combination of plunging commodity prices and a soaring dollar is drawing short sellers to emerging-market debt.
Bloomberg: – Russia junk rating to give buy signal as default unlikely. – A Russian downgrade to junk would have some investors seeing an opportune time to buy the nation’s bonds.
David Fabian: – 3 investments Jeffrey Gundlach loves in 2015. – During Jeffrey Gundlach’s “2015 Market Outlook” he spoke favorably about the underlying fundamentals in the strong U.S. dollar despite its rapid ascent last year and how currency trends can be “persistent and long lived”. Gundlach also spoke favorably about gold as a flight to quality instrument.
Morningstar: – Preserve purchasing power with this ETF. – This fund provides low-cost exposure to Treasury Inflation-Protected Securities, which can protect investors from long-term unexpected inflation.
Motley Fool: – Is this ETF the safest way to invest in high-yield mortgage REITs? – If you want to generate income from high-yielding stocks without drastically increasing your risk, you may want to consider a mortgage real estate investment trust (REIT) exchange-traded fund (ETF). Here’s why.
Think Advisor: – Under the hood: Bond Investing—Preparing for rate increases. – When rates rise, what bonds do you want to be holding? A look at the options.
Morningstar: – 2 ETFs for Eurozone bond exposure. – Two ideas for investors seeking yield from government or corporate bonds amid eurozone quantitative easing.
Morningstar: – ETFs win as fund managers fail to outperform. – Passive funds continue to attract assets as investors increasingly realise that most active-fund managers don’t offer value for money.
— Mohamed A. El-Erian (@elerianm) January 16, 2015
“This is the beginning of something much larger in bonds, USD and equities.” – a friend
— LST (@LongShortTrader) January 16, 2015
From HSBC’s Steve Major, the man who got UST call right last year: 10y to near 1.5%, US bonds offer better value than any other DM core debt
— Jamie McGeever (@ReutersJamie) January 16, 2015