Bond Market Nemesis Set to Return and Today’s Other Top Stories

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Inflation—one of bond investors’ chief enemies—may be making a resurgence. Writes Anthony Valeri, Senior Vice President of Fixed Income Research at LPL Financial.

While the rate of inflation remains low, market awareness about a possible bottom is increasing. This week the Federal Reserve’s preferred measure of inflation—core personal consumption expenditures (PCE)—is expected to increase to 1.4% for April 2014 after a 1.2% annualized rate in March.

To see a list of high yielding CDs go here.

Why should bond investors be concerned about rising inflation? Since most bond interest payments are fixed over the life of the bond, rising inflation can erode the value of those payments and lead to lower bond prices down the road.

However, increases in inflation expectations and in the broad price indexes, such as the CPI, are still modest by historical comparison. Writes Valeri. The 10- year TIPS yield suggests that CPI inflation will average 2.25% over a 10-year horizon—a low level.

Valeri says he believes inflation will increase slowly, but added that current bond yields offer limited protection against rising inflation. “Low real yields present an unattractive investment proposition for bond investors, and renewed weakness in the economy is needed to justify current real yields.” He said.

If inflation creeps toward the Fed’s 2% target over 2014 and into 2015, it suggests the Fed is likely on track to raise rates in late 2015/early 2016. The Fed is projecting a median 1.0% and 2.25% fed funds target rate by year-end 2015 and 2016, respectively, but fed fund futures indicate a 0.6% and 1.6% rate for the same time periods—a significant disparity. Fading rate hike expectations indicate pricing could be as good as it gets for high-quality bonds.

You can read the full article on Business Insider!


Todays Other Top Stories

Municipal Bonds

Cate Long: – De Blasio blows off bond signals. – Have the bond vigilantes begun to crack the whip at New York City Mayor Bill de Blasio? Capitol New York.

Reuters: – Puerto Rico electricity bonds get a charge from reforms. – Debt issued by Puerto Rico’s power provider got a boost on Wednesday after Governor Alejandro García Padilla signed into law measures aimed at stabilizing rates, diversifying energy sources and improving service.

BondBuyer: – Groups want congress to overturn ban on use of bonds with WIFIA program. – Water groups and state and local officials are already urging members of Congress to amend a new federal loan program for infrastructure projects to allow tax-exempt bonds to be used in conjunction with the financial assistance.

Bloomberg: – Illinois back in crisis as tax impasse risks rating. – Lawmakers are shunning Democratic Governor Pat Quinn’s plan to extend tax increases in effect since 2011, while also balking at spending cuts. The impasse means the lowest-rated U.S. state faces a $2 billion budget hole for the year beginning July 1 and risks further bond downgrades.

Forbes: – Time to buy muni bonds, here’s why. – Lately the way the public at large is whispering, tweeting and texting about the bond market so much that you’d think they were channeling Angelina Jolie. Where’s it going? Why? What does Europe think? Will it be dressed and ready when the new season of Fed tightening opens? Why are spreads so skinny? Getting so thin will cause pain and anguish. Well…you get the drift.

Bloomberg: – Muni-bond buyers may overpay, SEC’s Gallagher says. – Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, a member of the U.S. Securities and Exchange Commission said today.


Bond Market

LearnBonds: – What is going on in the bond market? – What is going on in the bond market? The yield on the 10-year Treasury Inflation Protected Securities (TIPS) closed below 20 basis points on Wednesday, May 28. This yield has not been so low since the middle of May in 2013.  The yield had actually been lower, but the rate had been so low because of all the money that had gravitated to the United States because of the financial conditions in Europe.

Kevin Flynn: – How stocks and bonds can both rally on nothing. – Short positions in stocks and bonds have been fueling prices. With the same economic data feeding different biases. While equities remain vulnerable.

Bloomberg: – Bond surge worldwide drives index yield to one-year low. – A worldwide bond-market surge pushed yields to the lowest levels in a year on growing evidence central banks can keep stimulating economic growth without igniting inflation.


Treasury Bonds

Yahoo Finance: – Treasury bonds will remain hot as long as recovery remains tepid. – The slowness of the economy to recover from the recession, plus the lack of inflation in the system means that US Treasury yields may remain low for a while longer, says Kirk Barneby, portfolio manager of the Centre Active U.S. Treasury Fund.

WSJ: – U.S. Government bonds near flat on mixed reports. – Treasury bonds traded near the flat line Thursday on a bout of mixed U.S. economic data, with the yield on the benchmark 10-year note near the lowest level in nearly a year.

Barron’s: – How low can the 30-year treasury yield go? – Even as the Federal Reserve has continued to taper bond purchases and hint at eventually tightening monetary policy, long-term Treasury yields have not only continued to fall, but outperformed all other maturities from two-year to 10-year bonds.

TheStreet: – Want Yield? Stay away from Treasury inflation-protected securities. – Treasury Inflation-Protected Securities, or TIPS, are an interesting subset of Treasury bonds designed to protect your purchasing power from the effects of rising consumer prices. However, many investors have fallen prey to the misconception that rising TIPS prices means an inflationary environment.


Corporate Bonds

ETF Trends: – Safe bond ETFs outperforming in corporate debt market. – The safest corporate bond exchange traded funds have attracted their fair share of interest this year, with U.S. investment-grade corporate debt now trading below pre-recession levels, but the outperformance may not last.

Bloomberg: – Buffett’s railroad bonds cheap to U.S. peers. – In Warren Buffett, Burlington Northern Santa Fe has one of the biggest safety nets in corporate America. You wouldn’t know it from the way the railroad’s bonds trade.


High Yield Bonds

MarketWatch: – Junk bonds turn up the risk for retirees. – Retirees with junk bonds need to be aware of the risks and determine if they are being adequately compensated for assuming those risks.


Emerging Markets

IFR: – Emerging market bonds surge as US Treasury yields hit 2014 low. – Despite much of Europe being on holiday today, emerging credit markets are extremely strong. This is best evidenced by the new Halkbank US$500m 4.75% five-year note, which has surged in the aftermarket to 101.25 from a reoffer price of 99.953.

Brown Shipley: – Emerging market bonds for yield and diversification. – Despite pockets of recent instability in countries like Ukraine and Turkey, emerging markets are today generally seen as less risky than in earlier years. In addition, while emerging market growth rates have not recovered to pre-crisis peaks, they still generally outpace developed markets.


Investment Strategy

Money Marketing: – Jim Leaviss: Finding value in global bonds. – Value may still be found in global bond markets as interest rates may remain lower for longer and inflation is not a near-term concern.


Bond Funds

Zacks: – Zacks #1 ranked government bond mutual funds. – Below we will share with you 5 top rated government bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future.

EuroMoney: – Have bond investors become too big? – The biggest bond funds now dominate the market for good or ill. Just how much muscle they now wield in the primary market is, however, a matter of some dispute.

FT: – Wanted: reliable second-hand bond dealers. – For carmakers, a strong second-hand market is essential. Unless buyers “hold to maturity” – the scrap heap – they want to sell their vehicles easily; they shun unpopular colours or lesser-known models. A poor resale market damps demand, and thus the prices customers are prepared to pay for new vehicles.

FT: – High demand sends coco bond yields to record low. – Yields for contingent convertible bonds have hit a record low this month, underlining investor willingness to shoulder more risk in their hunt for higher-yielding bank assets.


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Simon G

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