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Bond investors could be forgiven for thinking this summers bond sell-off was a one-off event which has now subsided. But as Michael Mackenzie points out in the FT, nothing could be further from the truth.
In the grand scheme of things this summers sell-off barely registered as more than a pimple, coming in at number 13 in the top bond sell-offs since 1962. And you didn’t even know there was a chart.
So what trouble awaits unsuspecting bond investors down the road? This summers sell-off happened, not because the tapering of bond purchases has actually started, but by the mere hint that it might start soon.
At some point in the next three months there’s a good chance that Fed Chairman Ben Bernanke will announce the Fed will actually start tapering back its $85 billion a month of bond purchases. When that happens you can expect bonds to take a tumble, a bigger tumble than we saw in June and July.
But where will all the money go? Will we finally see the start of the “Great Rotation” the mythical move from bonds into equities? There are signs that its already happening, but many analysts warn that the S&P 500 is currently fairly valued.
Ivo Weinoehrl, who oversees $1.27 trillion at Deutsche Asset & Wealth Management in Frankfurt told Bloomberg.
“We’ve seen a huge multiple expansion in the S&P over the past two years. I don’t see much upside left from a purely fundamental point of view.”
That leaves investors stuck between a rock and a hard place. Bond market heading for a fall and stocks fairly valued at best. So where do we go from here, well if Barry Ritholz doesn’t know, I certainly don’t.
There is another alternative of course, holding onto cash. But as Bill Gross told CNBC yesterday.
“Investors can still make more with bonds than with cash, and if they assume yield is all they’ll earn, and they are not speculating on prices, bonds entail less risk than stocks.”
Todays Other Top Stories
Bond Buyer: – Why Detroit could have avoided bankruptcy. – I have said this many times in the last few weeks: I don’t believe that Detroit had to file for Chapter 9 Municipal Bankruptcy. This report explains my position.
MarketWatch: – Treasury funds had record outflows; the rest of the bond market didn’t look as bad. – Investors appear to be developing a more nuanced view of the bond market’s various asset classes, a change from the indiscriminate selling that took place during much of the summer. Their sentiment about Treasurys is pretty clear, however: Flee.
MuniNetGuide: – Can muni investors still rely on the unlimited tax G.O. pledge? – Call it the Detroit paradox: the decades-long socio-economic decline that culminated in the Motor City’s bankruptcy filing is quite unique in its magnitude. Yet, Detroit’s Chapter 9 has also brought to the fore some universal issues that are likely to affect the entire muni market for years to come.
Bloomberg: – Potash Corp. bonds teeter toward junk in price-cut threat. – Potash Corp. of Saskatchewan Inc. bonds are heading toward junk status on wagers the breakup of one of the two marketing groups for the crop nutrient will lead to lower prices.
InvestorPlace: – The best way to invest in bonds during retirement. – The unique position the bond market is in right now argues for a fresh look. And by almost any measure, individual bonds look like the better bet for retirement-oriented investors who have the time and inclination to do the necessary research.
Wall Street Sector Selector: – Is the bond market bull dead? – After a 30 year bull market, the bond market could be heading for bear country.
Barron’s: – First ‘meaningful’ investment-grade bond inflows in 10 weeks. – Here’s the chart on investment-grade bond-fund flows from BofA Merrill’s credit strategists. They term the period’s $639 million inflows “meaningful,” which I guess it is in light of the ugly experience of June and July.
Forbes: – Another perspective on munis: The road to revenue. – Much has been said about munis in the past few months, particularly with respect to mutual fund redemptions, Detroit’s woes and concerns about widening credit spreads. Opportunistic investors – including, increasingly, institutions – are looking past these headlines to the total return potential of infrastructure revenue bonds.
CNBC: – Michigan issuers feeling heat from Detroit filing. – Detroit’s bankruptcy filing is making it tougher on other Michigan issuers that want to tap the muni bond market.
Investment News: – Interest rate fears causing muni bond pains. – Interest rates have cooled off since they spiked in the second quarter, but investors are still running from municipal bond funds, causing the illiquid securities to underperform their taxable counterparts.
Bloomberg: – Michigan muni sale delays rise to 3 as Snyder stands by. – Saginaw County joining at least two other Michigan issuers in putting off municipal bond sales shows the fallout from Detroit’s bankruptcy is greater than expected by Governor Rick Snyder and Emergency Manager Kevyn Orr.
Sunday Times: – Investors rush to dump bonds. – Investors pulled hundreds of millions of pounds out of bond funds in June amid fears over further losses on assets previously seen as low risk.
BusinessWeek: – Detroit’s bankruptcy doesn’t faze the municipal bond market. – Strange as it may seem, Detroit’s bankruptcy filing—the biggest ever for a U.S. city—doesn’t appear to have unnerved the $3.7 trillion U.S. municipal bond market. Tom Hamilton, finance director of Norwalk, Conn., had no trouble finding buyers for $21 million in general obligation bonds on Aug. 1. Localities from Washington State to Alabama to Massachusetts planned to sell $8.6 billion in debt during the first full week of August, the most since April.
Reuters: – Bonds struggle in transition to e-trading. – Banks and investors are losing hope that the US corporate bond market will ever have the thriving electronic trading system seen in stocks, despite years of efforts on both sides to build interest in doing business electronically.
Bond market passes this week's auction tests with good not great demand. Dealer take below avg, foreign int strong – overall modest pos
— AnthonyValeri (@Anthony_Valeri) August 9, 2013
Potential muni bond volume for next week should total $4.27B, down from $6.42B this week, Ipreo, Bond Buyer and Thomson Reuters numbers show
— James Ramage (@RJamesRamage) August 9, 2013