The bond market is sending out some confusing messages at the moment, on the one hand forecasters are sticking to estimates that the 10-year note will climb next year and reach 3.6 percent as the Federal Reserve increases interest rates.
While on the other, based on the performance of long-term Treasuries, implied yields suggest investors don’t foresee yields that high for a decade or more.
Getting it right has never been more important. With America’s outstanding public debt at a record $17.7 trillion, Fed Chair Janet Yellen faces the task of lifting rates from close to zero without sparking a surge in funding costs. Writes Bloombergs Liz Capo McCormick. While economists point to unrest in Ukraine and Gaza for why Treasuries remain in demand, the bond market’s view that the U.S. expansion isn’t strong enough to force the Fed’s hand suggests yields can stay low for years to come.
“The market indicators are telling us that forecasts are too aggressive,” Michael Darda, the chief economist at MKM Partners LLC, said in a telephone interview from Stamford, Connecticut, on Aug. 18. That helps to show “the ankle biting about the Fed being behind the curve is nonsensical.”
The Minutes of the Federal Reserve’s July policy meeting released on Aug. 20 showed “many” participants said the Fed might raise borrowing costs sooner than they had anticipated.
But even if they do, investors in the $12.2 trillion market for Treasuries harbor few of the worries that would lead to the jump in yields that economists and strategists anticipate.
The differences between yields on Treasuries of different maturities imply the benchmark 10-year note, which has fallen more than a half-percentage point this year to 2.4 percent today, will only reach 2.8 percent by the end of 2015, according to data compiled by Bloomberg.
Todays Other Top Stories
LearnBonds: – Are bonds and commercial real estate the perfect mix? – Financial advisors are often quick to point out that investors absolutely need an allocation to stocks in their portfolios. The following chart, however, may challenge conventional wisdom.
The Seattle Times: – Closed-end muni funds open you up to risk. – Investors should consider how much risk they are taking to get yield. Here are three major risks that you may not have put into your income equation.
CNBC: – Judge OKs $1.5B Detroit bond repurchase plan. – A U.S. bankruptcy court judge on Monday approved Detroit’s proposal to repurchase nearly $1.5 billion of existing water and sewer revenue bonds tendered by investors and to refinance the debt to save money.
Barron’s: – In the bond market, it’s no time for heroes. – (Subscription required) With interest rates as low as they are, it has become much more difficult to squeeze out positive returns, especially for those fixed-income managers hewing to a cautious approach. Among the investors in that camp are Tad Rivelle, chief investment officer, fixed income, at TCW, and Laird Landmann, co-director of U.S. fixed income at the Los Angeles-based firm. TCW manages about $142 billion of assets.
Bloomberg: – Treasury five-year note yields climb most since April on Yellen. – Treasury five-year notes tumbled, pushing yields up the most in four months, as comments from Federal Reserve Chair Janet Yellen and minutes from the last policy meeting reinforced bets the central bank will begin raising interest rates next year.
Investment Grade Bonds
ETF Trends: – Investors should hold higher quality corporate bond ETFs. – After the recent sell-off in high-yield bonds, investors should take a second look at investment-grade corporate bond exchange traded funds as a more stable play for the fixed-income market.
High Yield Bonds
FT: – No need to panic about high-yield bonds. – (Subscription required) Keep calm and carry on has characterised the market for high-yield bonds despite a recent bout of intensive selling by retail investors.
ETF Trends: – Junk bond ETFs say return to me; Investors listen. – After a wild July that saw investors, primarily of the retail variety, flee high-yield bond exchange traded funds, junk is back in style with week ending Aug. 20 representing the best week of inflows to junk bond ETFs this year.
WSJ: – High grade corporate bond secondary market braced for change? – (Subscription required) A return to interest rate normality and a central clearing engine could address the liquidity risks faced by corporate bond investors, after this month’s market volatility highlighted how passive dealers have become.
Barron’s: – Hedge the junk in your trunk. – (Subscription required) New junk-bond ETFs aim to protect against rising rates by shorting Treasury bonds. But how do you protect against falling junk bonds?
Funds Society: – The case for high yield, revisited. – While volatility has recently increased in the high yield market, Neuberger Berman believes this has been largely driven by technicals, not a downturn in the underlying fundamentals that typically drive performance in the asset class. On a recent Whitepaper (15th August), they discuss the current fundamentals in the high yield market and its performance in different economic environments.
Zacks: – Flow reverses for high-yield bond funds: 3 funds worth buying now. – High-yield bond funds have finally rebounded from the record outflow they witnessed for about a month. Threat of an interest-rate rise and the winding down of monetary stimulus had left investors fleeing the sector till early August. The first week of August was noticeable with high yield funds witnessing a record $7.1 billion outflow. Bank of America Merrill Lynch said it was the biggest outflow ever in dollar terms.
ETF Trends: – Considering your emerging market bond ETF options. – With more exchange traded fund options now available, fixed-income investors can expand their portfolios to include emerging market debt exposure. However, not all ETFs are created equal, so potential investors should review the various offerings before diving in.
Business Insider: – The riskiest thing bond investors are doing right now. – The dramatic reach for yield” is a major cause for concern. And in the backdrop of a low rate environment, and interest rate risk, she says the riskiest thing people can do is have a short time horizon.
Barron’s: – Ready for a rate hike—or not. – (Subscription required) Federal Reserve Chair Janet Yellen’s latest speech didn’t ruffle many feathers, but bonds could still be in for a big plunge when the Fed finally raises interest rates.
Morningstar: – Don’t be scared of rising interest rates. – One of the most frequently asked questions that we have been hearing over the past few years has been, “What impact would rapidly rising interest rates have on our bond holdings?” We know we are not alone in hearing this concern, considering how often this topic is discussed in the media. As most investors are well aware, when interest rates rise, bond prices go down, so these ostensibly safe bond holdings now appear riskier than before.
ETF Trends: – Between the hedges with junk bond ETFs. – Investors can protect against interest rate with several hedged high-yield ETFs, all of which are relative newcomers.
Business Recorder: – Retail investors pay price as hedge funds dominate ETFs. – Junk-bond ETFs created for retail investors have been hijacked by hedge funds using them to make broad bets on bond prices, causing roller-coaster distortions in the high-yield market. Funds designed for retail investors have morphed into hedging tools that sell off too suddenly, and in too great a size, for illiquid high-yield bonds to keep up.
ETF Trends: – Build America bond ETFs susceptible to rate risk. – Build America Bonds and related exchange traded funds provide attractive yields and have outperformed other tax-exempt municipal bonds. However, these debt securities face greater risks in a rising rate environment.
Detroit lawyer Heather Lennox says all 4 bond insurers are now on board with new bonds for Detroit water department.
— Matt Helms (@MattHelms) August 25, 2014
— Peter Tchir (@TFMkts) August 25, 2014
#DETROIT WATER BOND EXCHANGE APPROVED BY BANKRUPTCY COURT JUDGE
— Brian Chappatta (@BChappatta) August 25, 2014