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With interest rates at nearly zero, income seeking investors have been forced to plumb the depths of the High Yield market and other more complex investments in search of a respectable return. This has led the Financial Industry Regulatory Authority FINRA to issue a warning, saying that investors are taking risks they either do not understand or cannot afford.
FINRA chairman Richard G. Ketchum told the Financial Times:
“These products present clear hazards for investors and require regulators to monitor market conditions and the sales practices of financial professionals.”
Many of these investments take the form of structured products which, unlike corporate or government bonds, typically involve some level of unsecured debt and feature payouts linked to underlying assets such as a narrow or proprietary index or some other obscure benchmark.
In some cases this isn’t the fault of investors themselves, many advisory firms have been aggressively marketing these products to clients with the initial promise of high yields. It was these selling practices which prompted FINRA’s warning.
Therefore the message is clear, If you do not fully understand the leverage and other risk and reward features of the investment which you’re being sold, you should stop right there. A good general rule is never invest in products you do not understand.
Todays Other Top Stories
MuniNetGuide: – Retail investors and the Puerto Rico debacle. – There’s nothing quite like ugly poll numbers to motivate politicians. Faced with unprecedented disapproval ratings from the electorate, our fearless leaders in Washington have reportedly decided to return to the negotiating table to work out at least a short-term deal to raise the debt ceiling for another six weeks. Depending on the details of the final agreement, if there is one, we could be right back to exactly the same place a few weeks from now.
HJ Sims: – Puerto Rico’s worst case scenario. – I’ve tried to make the case that retail investors concerned with income and not prices have a sound investment in Commonwealth-issued debt. There is evidence all around that the make-up of institutional investors of Puerto Rico debt is changing significantly. With all that in mind, buyers and sellers of the Commonwealth’s debt, beware of the sharks.
Reuters: – SEC wants muni underwriters to stay on top of disclosure. – A U.S. Securities and Exchange Commission official warned municipal bond underwriters on Thursday that they must make sure their issuer clients keep up with their disclosure obligations.
Bloomberg: – Brown signs bill authorizing $25 ‘Minibonds’ for California. – California, the nation’s largest issuer of municipal debt, will sell so-called minibonds for $25 to individual investors in addition to conventional $1,000 amounts, under a bill signed by Governor Jerry Brown.
Closed End Funds
Learn Bonds: – CEFs: Spelling Discount Opportunity For Bond Investors. – Though ETFs have become a bond investor portfolio staple over the past decade, few tend to be familiar with a similar, yet decidedly more complicated vehicle known as the closed-end fund, or CEF for short. And given most bond focused CEFs currently trade with market values equal to less than their net asset values, now is the perfect time for investors to be considering them.
Bloomberg: – Obama says real boss in default showdown means bonds call shots. – “Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.
WSJ: – Treasurys slide; Demand strong for sale. – Treasury bond prices fell as signs of progress toward breaking the fiscal gridlock in Washington reduced the allure of the safe-harbor market, though a strong 30-year bond auction kept selling pressure in check.
MarketWatch: – Pimco’s Bill Gross to Fidelity: ‘We’ll buy those bonds’. – On the heels of news that Fidelity has cut out its exposure to short-term Treasury bills due around the time the U.S. could breach its debt ceiling, Pimco’s bond guru Bill Gross said. “We’re doing exactly the opposite actually… probably buying what Fidelity is selling,” Gross, manager of the world’s largest bond fund, said in an interview after the market closed on Wednesday.
Bloomberg: JPMorgan clients roll bonds as Schwab options hedge default. – With the deadline for avoiding a U.S. default looming, investors from Boston to Bangalore are moving to cash, extending the maturities of their short-term Treasury holdings and buying options to help protect themselves should stock and bond prices tumble.
ETF Trends: – High-Yield Bond ETFs: Interest Rate risk vs. Credit risk. – Senior floating-rate bank loans have helped investors generate income under the threat of rising rates, but with the Fed holding off on tapering, high-yield, junk bond exchange traded funds could be a better play.
Barron’s: – Keep paring rate risk, adding credit risk – Barclays. – Barclays credit strategists Bradley Rogoff, Eric Gross and Ellie Lan today look back at a strange period over the summer when high-yield bond spreads rose in tandem with interest rates, pretty much the opposite of how that relationship usually works.
Barron’s: – Junk bonds better than bank loans now. – If you held a popularity contest between bank loans and junk bonds this year, bank loans would win, as they’ve remained investor darlings throughout 2013, with bank loan funds just chalking up their 69th straight week of net investor inflows. But popularity contests shouldn’t guide investment decisions, and credit strategists at Citi Today say the popularity of loans has made them less attractive than junk bonds at this point.
Forbes: – High yield investors, unfazed by mega issues. – High-yield issuance in September broke a record not only for volume, but also for the number of tranches of $1 billion or more. With the high-yield market twice as big as at the peak of the last credit cycle, and with issuers more disciplined, it’s no surprise that the market barely flinched.
BusinessDay: – HSBC strategists bullish on EM local bonds, stocks. – The outlook for inflation should determine investors’ cross-asset allocation, according to Pablo Goldberg, global head of emerging markets research at HSBC Securities, as the US Federal Reserve signals that the end of its quantitative easing policy is near.
Barron’s: – Thanks Congress, capital flowed out of EM, DM funds – equity and bonds. – In the week ending October 9, capital flowed out of EM equity and bond funds, but retail money’s risk-off attitude is extended to developed markets as well, data provided by Barclays analysts Durukal Gun and Koon Chow shows.
Bloomberg: – I wouldn’t buy bonds at this time: Albertson. – In today’s “This Matters Now,” Robert Albertson, chief strategist at Sandler O’Neill & Partners, talks with Tom Keene about the impact of rates on U.S. banks and preparation for a jump in rates as the Federal Reserve moves to end quantitative easing. He speaks on Bloomberg Television’s “Bloomberg Surveillance.”
MoneyBeat: – Don’t abandon bonds, rotate them. – If you want to preserve your capital and, potentially, turn a profit on your bond portfolio as major central banks prepare to shift interest rates higher, U.S. High Yield debt may well be a worth a second look.
Morningstar: $48 billion outflow from muni funds since March surpasses Nov. 2010-Aug. 2011 period, aka Meredith Whitney era.
— Brian Chappatta (@BChappatta) October 11, 2013
Potential municipal volume for next week should total $4.19B, from $3.51B this week, per Ipreo, The Bond Buyer and Thomson Reuters numbers.
— James Ramage (@RJamesRamage) October 11, 2013
S&P Indices: Weighted avg price of Puerto Rico bonds in index down 6.6% for month to date and down nearly 25% for the year. #muniland
— Cate Long (@cate_long) October 11, 2013