2014 has been a good year for bond investors, but that could end next year according to CIBC World Markets chief economist.
While yields remain low at a time when the U.S. economy is especially surging, with strong growth in the labour and housing market, Avery Shenfeld, chief economist at CIBC World Markets, notes that the economies of the U.S. and Canada suggest that bond yields can’t remain at current levels for much longer.
To see a list of high yielding CDs go here.
“Clearly, fixed income players haven’t given much weight to labour markets,” he said. “In Canada, higher than normal involuntary part-time workers are the equivalent of a few extra tenths in the jobless rate, but the official measure of 6.5% has closed in on our 6.2% estimate of full employment.”
He also notes that the U.S. is “miles past the 6.5% rate the Fed once mentioned as a criterion for thinking about rate hikes,” meaning that rate hikes are almost a guarantee next year. The latest data show the U.S. unemployment rate sits at 5.9%.
Bond yields, however, remain low because of investor fears about conditions outside the U.S. and Canada. The eurozone and Japan are both either in recession or on the cusp of it, and the stability of China’s financial sector and its shrinking economic growth continue to unnerve markets.
“Bond markets may sleep through the end of this year, but even a small dose of rate hikes ahead will be a rude awakening in 2015,” he said.
Todays Other Top Stories
Learn Bonds: – Bond market continues to record falling expectations of inflation. – The inflationary expectations investors have built into the bond markets crashed through another level this week.
Reuters: – Soaring high-yield muni funds could fall in 2015: Eaton Vance. – High-yield U.S. municipal bond funds, which saw runaway returns for most of this year, could spiral downward in 2015 if investors become spooked anew by negative headlines out of Puerto Rico, a senior portfolio advisor at Eaton Vance said on Tuesday.
Bloomberg: – California set to take in $2 billion more revenue than forecast. – Higher taxes and an improving economy will boost California’s revenue $2 billion above the income Governor Jerry Brown projected in the budget he signed in June, the state’s fiscal analyst said.
MarketWatch: – Value opportunities in today’s Municipal bond markets can be unearthed with research. – Over the past year, municipal bond markets have experienced resurgences that have made them increasingly attractive to a broad range of investors. Yet, municipal fixed-income bonds can be complex, and analyzing and finding value among the many securities available can challenge even experienced financial managers.
Financial Post: – Bond markets to get rude awakening in 2015. – It’s been a good year to be a U.S. or Canadian bond investor, but that could end next year, says CIBC World Markets chief economist.
Reuters: – Investors overpaying for yield after years of low rates. – Six years of interest rate suppression by the U.S. Federal Reserve has driven up prices for high-yielding assets and forced investors searching for income to overpay for everything from junk bonds to stocks that pay big dividends, top money managers told the Reuters Global Investment Outlook Summit this week.
Reuters: – U.S. TIPS breakeven rates fall further after FOMC minutes. – The U.S. bond market’s gauges of inflation expectations fell to their lowest in more than a month on Wednesday after minutes of the Federal Reserve’s October meeting suggested the U.S. central bank remained on track to raise interest rates next year.
Bloomberg: – Treasuries climb as reports show weakening in euro region, China. – Treasuries rose, pushing 30-year bond yields to the lowest in three days, as purchasing-manager indexes showed economic weakness in the euro area and China.
Bloomberg: – Bond record in sight as sales near $4 trillion. – Global corporate bond issuance has surpassed all of 2013, with the annual record now in sight as investors reap the biggest gains since 2002.
Bloomberg: – Alibaba said to get $57 billion of bond orders in debut. – Alibaba Group Holding Ltd has $57 billion of orders from investors in a debut bond offering, more than seven times what the company was said to be seeking and allowing underwriters to reduce proposed yields, people with knowledge of the deal said.
High Yield Bonds
Reuters: – Calvert’s Roy says high-yield market offers ‘some good gems’. – Low default rates and slow U.S. growth mean that high-yield bonds remain an attractive investment area, Calvert Investment Management bond chief Cathy Roy said on Wednesday.
Reuters: – Falling oil prices hit junk bonds in energy sector. – Several months ago, U.S. mutual funds scooped up most of the $1.25 billion in high-yield junk bonds issued by Denbury Resources Inc, a Plano, Texas, oil and gas exploration company.
Bloomberg: – Three junk sectors see protections improve, Moody’s says. – Investor protections on North American corporate junk bonds strengthened in three industries for the third quarter, the first time this year that all sectors failed to deteriorate, according to Moody’s Investors Service.
Income Investing: – T. Rowe Price: Fixed-income opportunities in Europe, EM. – Junk bonds have made big gains since the meltdown of 2008 and early 2009. But analysts are growing cautious on the sector, citing valuations.
CNBC: – Where is the high yield opportunity? – Gershon Distenfeld, director of high yield debt at AllianceBernstein, discusses where he thinks the best opportunity is in the high yield space, but warns that a lack of liquidity in the sector keep him up at night.
Bloomberg: – Small caps dropping with junk ETF stir anxiety in traders. – Declines over the past week in small caps, transportation companies and a security tracking high-yield debt are stirring unhappy memories in U.S. traders.
Artemis: – Catastrophe bond & ILS market reaches record high at $23.431 billion. – The outstanding catastrophe bond and insurance-linked securities market, based on transactions listed in the Artemis Deal Directory, has reached a new all-time high of $23.431 billion, demonstrating that ILS and cat bonds continue to generate strong interest.
Bloomberg: – Traders spot 63% profit in Argentina dollar-linked bonds. – Investing in a country that uses multiple foreign-exchange rates to control the flow of dollars can be fraught with risk. In Argentina, it’s also giving bond traders a chance to reap a profit exceeding 60 percent.
Money Beat: – Here are Goldman Sachs’s top trades for 2015. – The release of Goldman Sachs’ top trade ideas for the year ahead is an annual staple. Whether you think these are power trades or not, the time has come for this year’s release.
Business Insider: – George Soros just gave Bill Gross $500 million to play with. – In an announcement on its website, Janus announced that Quantum Partners, a private investment vehicle managed by Soros Fund Management, will invest $500 million in an account to be managed by Bill Gross.
Financial News: – A new-look Pimco, net of Gross. – (Subscription) Daniel Ivascyn, who succeeded Bill Gross as Pimco’s chief investment officer in September, insists that size really does matter in the world of global bonds.
ETF.com: – The 4 different costs of ETF ownership. – ETFs have probably done more to improve investor outcomes than any innovation in financial services since the mutual fund. A big part of that is the cost equation. The average equity ETF, for instance, has an expense ratio of just 0.45%, vs 1.37% for the average equity mutual fund. But headlines aren’t the whole picture. How should you think about your real, total costs of ownership. Ultimately, it breaks down into four components.
Kiesel CIO: US housing outlook remains ‘bright’ w improving jobs/income/confidence. Favor bldg materials as re-model activity should pick-up
— PIMCO (@PIMCO) November 20, 2014
— Bob Brinker (@BobBrinker) November 20, 2014
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