Treasuries rose for the first time in three days on Tuesday as concerns over the eurozone’s struggling economy and plunging oil prices added to investor expectations that inflation will remain subdued while the U.S. economy strengthens.
The strength in Treasuries comes after the European Commission, slashed growth forecasts, saying that it now expects a 0.8% growth rate for the eurozone this year, down from the 1.2% growth it forecast this spring. In 2015, the eurozone economy will likely grow 1.1%, down from the 1.7% previously forecast.
The forecasts for the currency union were dragged down by lower than-expected growth in big countries, including Germany, France and Italy.
While the price of West Texas Intermediate crude oil dropped to a three-year low after Saudi Arabia cut prices. U.S. 10-year notes briefly erased gains after Federal Reserve Bank of St. Louis President James Bullard said a drop in oil is bullish for the economy.
“The concern is that the oil decline could represent signs of general global economic weakness at a time when growth is still somewhat fragile, and falling oil prices keep inflation in check, which is a positive for bonds,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets.
U.S. 30-year yields, among the most sensitive to the outlook for inflation, declined three basis points, or 0.03 percentage point, to 3.03 percent at 12:11 p.m. New York time, according to Bloomberg Bond Trader prices. They sank as much as five basis points, the most since Oct. 16. The 3.125 percent security due in August 2044 rose 19/32, or $5.94 per $1,000 face amount, to 101 25/32.
Benchmark 10-year note yields fell two basis points to 2.33 percent after sinking earlier as much as four basis points.
Todays Other Top Stories
Learn Bonds: – Strange days in the bond market. – The bond market believes that it marks move to a new normal. It is our opinion that instead of all rates moving higher, the first Fed Funds Rate hike will result in a flattening of the yield curve.
Income Investing: – Bondholders losing ground to retirees in muni bankruptcies. – As two of the biggest municipal bankruptcies are winding down, they’re leaving behind precedents for future cases that seem to increasingly benefit retirees at the expense of bondholders.
Elliott Wave: – Municipal bonds score big: Are munis the remedy for a volatile stock market? – The perceived safety, tax-exempt status and 2014 track record of municipal bonds may appeal to even more investors during this time of stock market volatility. But what if the economy takes a turn for the worse, and the borrowing costs for municipalities rise as their tax revenues fall?
Bloomberg: – Municipal bond advisers face curb on local political donations. – Financial advisers to U.S. state and local governments would be barred from using political contributions to win business under a proposal advanced by bond-market regulators.
MMA: – What do the midterm elections mean for municipal bond issuers? – If Republicans are able to win the Senate, the prospects for any tax‐credit or similar exemption‐replacement programs will dim accordingly. Besides if its cost to Treasury, Republicans’ principal quibble with the exemption has been the easy access to capital it provides even to poorly run states and locals. There has been little Republican support for BABs or similar Democratic efforts to replace the exemption for purposes of better Federal control/efficiency in the past.
Bloomberg: – Munis beating all debt on confidence in Local Government. – The best-performing U.S. debt in 2014 is from municipalities, showing confidence in the fiscal stewardship of state and city leaders as they tackle challenges from crumbling roads to climbing pension deficits.
Financial Advisor: – Embracing bonds. – Higher economic growth and inflation could push 10-year Treasury yields to the 2.5%-3% range by year’s end. This is barring a surprise such as a major stock correction or an outside event like the acceleration of a war or continued unrest in the Middle East or Ukraine.
ETF Trends: – Foreign investors prop up Treasury ETFs. – The Federal Reserve ended its quantitative easing program, but Treasury bond securities and related exchange traded funds won’t suddenly fall out as foreign investors help pick up the slack.
About.com: – How falling inflation hurts your TIPS bond fund. – Bond funds and individual bonds have very different performance characteristics, but nowhere is this more apparent than it is in a comparison between individual Treasury Inflation Protected Securities (TIPS) and TIPS bond funds.
WSJ: – Apple sells bonds in Euros. – The iPhone maker issued its debut non-dollar bond Tuesday, offering €2.8 billion ($3.5 billion) in debt maturing in eight and 12 years, following up on a plan outlined earlier this year to broaden the number of investors it can borrow money from.
High Yield Bonds
Bloomberg: – New junk-bond derivatives are hot as traders get creative. – When it gets tough to maneuver in the junk-bond market, traders can either give up or get creative. Many of them are opting for creativity these days.
MarketWatch: – Recent rout makes high-yield bonds intriguing. – Retirees searching for income are stuck. Yields on traditional fixed-income instruments are in the 1%-2% range. For those investors with a more balanced approach, that is, not looking to use high yielding stocks as a replacement for bonds, it may pay to look at high-yield bonds.
Gary Gordon: – When will emerging market ETFs join the ‘risk-on’ party? – The world’s semi-coordinated effort to fight deflation as well as pump up gross world product has sent a number of ETFs onto the list of New 52-Week Highs. Emerging markets are neither seeing the love in price appreciation or inflows. One might be better served to watch for the possibility of a relative strength revival from the basic materials sector.
Bloomberg: – Argentina default no obstacle to Schroders conquering all. – Pablo Albina, Schroders Plc head of Latin America fixed income, says investors who abandoned Argentina’s bonds after the nation defaulted are missing out.
Insurance Journal: – Hedge funds need to be wary of push into catastrophe risks. – Hedge funds looking for new investments may be pushing too fast into insurance, said Michael McGavick, the chief executive officer of XL Group plc. McGavick joins Franklin Montross, the CEO of Berkshire Hathaway Inc.’s General Re, and Ace Ltd.’s Evan Greenberg in saying that new sources of capital may not appreciate how much can go wrong in weather-related bets, even with historical data that is used to model the chance of storms.
Artemis: – Ursa Re 2014-1 catastrophe bond launches for California Earthquake Authority. –The California Earthquake Authority is returning to the catastrophe bond market with its latest issuance under a newly registered vehicle. The Ursa Re Ltd. (Series 2014-1) cat bond is targeting at least $350m of collateralized California quake reinsurance.
Market Realist: – Using sector rotation during rising interest rates. – So how can an investor use sector rotation during a rising rate period? By rotating some assets out of fixed income sectors that tend to underperform in this kind of environment and into sectors that tend to benefit.
Financial Advisor: – Bond swaps mitigate tax liabilities and reduce interest-rate risk. – Financial advisors always look for ways to minimize tax liabilities for clients at year’s end, and many utilize tax swaps (and especially bond swaps) in pursuit of that annual goal. However, bond swaps take on an added urgency this year. With interest rates expected to rise, advisors can use bond swaps to not only mitigate tax liabilities, but also improve the quality of their clients’ fixed-income holdings going into 2015.
Reuters: – DoubleLine attracts $2.38 bln net inflows in Oct, record for year. – Jeffrey Gundlach’s DoubleLine Funds, an investment firm that has been a major rival of bond fund giant Pimco, reported its ninth consecutive month of inflows in October, totaling $2.38 billion, a record for monthly inflows so far this year.
LA Times: – Outflows from former Gross fund at Pimco send billions to rival firms. – Investors poured billions of dollars during October into smaller rivals of Pacific Investment Management’s Total Return Fund, the enormous mutual fund once overseen by “bond king’ Bill Gross, who quit Pimco abruptly in late September.
Reuters: – U.S. exchange-traded products attract $27.5 bln in October. – Investors poured $27.5 billion into U.S.-listed exchange-traded products in October, with most of that money going into fixed-income funds for the biggest monthly inflow so far this year, according to data from BlackRock Inc.
ETF Trends: – BOND bleeds, but other PIMCO ETF see modest inflows. – The PIMCO Total Return ETF, the exchange traded fund managed by Bill Gross prior to his resignation from the firm he founded, lost another $437 million in assets last month. But other Pimco ETFs saw modest inflows.
Saving money doesn’t make you wealthy. Bonds, stocks, and real estate can get you there. Rich people don’t get richer by saving money.
— The Coasters (@CTC_William) November 4, 2014
Goldman cuts US Q3 GDP growth tracking estimate to 3.0% vs 3.5% after trade data, in line with others. Raises Q4 estimate by 0.2pp to 2.4%
— Jamie McGeever (@ReutersJamie) November 4, 2014
JPM reckons Fed QE created large wealth effects of around $9tr in US equities + $2.5tr in US real estate through yield compression alone
— Chris Whittall (@Chris_Whittall) November 4, 2014
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