Two fund managers are warning investors to brace themselves for more volatility in both stock and bond markets. Hamish Baillie and Steve Russell, managers of the Ruffer Investment Company, warned further volatility lies ahead as the risks of holding both equities and bonds are laid bare.
The pair said they expect to see a resurgence in the volatility that hit markets back in October, particularly as they feel markets still haven’t realised that quantitative easing led by the Federal Reserve will soon come to an end.
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‘Overall, observing the events of the last month as volatility returned to financial markets, we cannot help but feel that we are emerging from a period when it has been easy, but dangerous, to make money into a time when holding either equities or bonds will remain dangerous whilst returns will be harder to come by and more volatile.’
In their monthly outlook, the pair noted: ‘The recent environment of medicated asset prices, stemming from zero interest rates, unprecedented amounts of monetary stimulus and artificially suppressed volatility, will not last forever and its ending is unlikely to be pleasant.’
In particular, the pair point to the recent notable one day swing in the yield in 10-year Treasuries from 2.21% to 1.86%, previously only seen in 2008 and other meltdowns. They feel this drop, in such a ‘risk-free’ asset, is an indication of further volatility.
While the duo points to a well-timed intervention by the Bank of Japan to add to its existing monetary policy campaign, they are less positive on the European Central Bank and its ability to stimulate growth.
‘We hope the eurozone governments and European Central Bank are watching closely, but we are not holding our breath.’
Todays Other Top Stories
Learn Bonds: – 7 Step strategy for long-term bond investing success. – We all live busy lives and only have so much time that can be dedicated to learning about the financial markets and executing our portfolio strategy. With that in mind, I would like to present, as concisely as possible, my outline for obtaining long-term success in bonds. It consists of the following seven steps.
NY Times: – James A. Lebenthal, muni bond expert, dies at 86. – James A. Lebenthal, America’s best-known municipal bond salesman, who turned the tax-free financial instruments called munis into a household word with radio and television ads dramatizing how ordinary investors built subways, sewers, bridges and schools, died on Friday in Manhattan. He was 86.
Bloomberg: – Munis cheapest to Treasuries in nine months amid November losses. – The $3.7 trillion municipal market is the cheapest relative to Treasuries since February as a glut of bond sales pushes state and local debt toward the first monthly decline of 2014.
ETF Trends: – Why an ETF may make sense for munis exposure. – When looking into the municipal bond market, fixed-income investors may be better off with a muni bond exchange traded fund, instead of trading individual debt securities.
Bloomberg: – Puerto Rico Governor to call special session on bond bill. – Puerto Rico Governor Alejandro Garcia Padilla plans to call lawmakers back to work on a borrowing bill that would bolster the finances of the Government Development Bank.
Bloomberg: – Muni bond brokers to reveal same-day markups under proposal. – Municipal bond brokers would be required for the first time to disclose how much they mark up the price on securities sold to individual investors under a proposed rule.
Reuters: – Puerto Rico seeks insurance for up to $2.9 bln bond deal-GDB head. – Puerto Rico is in talks with four bond insurers to insure at least part of up to $2.9 billion in bonds that the troubled U.S. commonwealth wants to issue later this year, the president of the Government Development Bank (GDB) said on Friday.
WSJ: – Muni-bond buyers may get more data on price markups. – (Subscription) Individuals who buy municipal bonds may get more information on what their securities firm paid for them under new requirements proposed by the Municipal Securities Rulemaking Board.
Bloomberg: – Bond pain seen ending for bears in poll saying they’re right. – After the legions of market savants missed out on hundreds of billions of dollars in gains this year anticipating a tumble in bonds, you’d think they would have found another target. You’d be wrong.
Bloomberg: – Draghi says ECB measures might entail buying government bonds. – European Central Bank President Mario Draghi explicitly cited government-bond buying as a policy tool officials could use to stimulate the economy if the outlook worsens.
Financial Post: – In defence of government bonds: Because sometimes the world doesn’t go just like it’s supposed to. – At the beginning of 2014, it seemed like everyone was calling for interest rates to rise. The argument was simple: The U.S. Federal Reserve was set to reduce its asset purchase program, so bond yields had nowhere to go but up. They were wrong.
Reuters: – U.S. long-end prices up a 3rd day, low inflation helps. – U.S. long-dated Treasury debt prices rose on Friday for a third straight session, as institutional buyers scooped up bonds, comforted by benign inflation in the world’s largest economy that should allow the Federal Reserve to keep interest rates lower for longer.
WSJ: – U.S. Government bonds retreat on corporate-debt sales. – Treasury bonds pulled back Monday, weighed down by new corporate bond debt supply.
Donald van Deventer: – Kinder Morgan Energy Partners topped best value long-term bond ranking last week. – We rank all trades for bonds with maturities of 10 years or more by our usual criterion for “best value,” the ratio of credit spread to default probability.
High Yield Bonds
Bloomberg: – A $113 billion bet high-grade debt thrives on slowdown. – There’s about $113 billion that seems to be betting on a growth slowdown instead of higher interest rates.
ETF Trends: – Another week of inflows for junk bond ETFs. – After fleeing the funds in September and the first half of October, investors continue returning to exchange traded funds holding speculative-grade debt.
Investing.com: – Emerging market bonds: Where do we go from here? – Investors that were early to identify the attractive valuations following the volatility in emerging market bonds in early 2014 are still sitting atop a pile of gains, yet in recent months new investors haven’t experienced the same steady uptrend.
Citywire: – Can Argentina be the top bond market in 2015? – After a torrid year for Argentina, T Rowe Price portfolio specialist Jeff Kalinowski believes the South American country could be the star of bond markets in 2015.
FT: – Market challenges abound in Latin America despite high growth. – (Subscription) In their quest to avoid foreign exchange risk and global market volatility, Latin American companies have been turning to local bond markets to meet their funding needs.
Artemis: – World Bank set to bring more cat bonds, looks at health risk transfer. – The World Bank is exploring potential new transactions as part of its Capital-at-Risk Notes Program, where it issues catastrophe bonds on behalf of sovereign entities. The Bank is also considering ways to use the facility to provide health risk transfer as well.
S&P Dow Jones Indices: – Are green bonds really in the red? – The green credit market has grown 50% annually since 2007, however, market sentiment remains mixed on performance. The S&P Green Bond Index is down 0.99% YTD, when most of the bond market has done quite well in 2014. Abundant growth in concert with poor performance could prompt the suggestion that investors are deriving utility from social responsibility in lieu of returns.
Citywire: – On course for converts: selectors reveal bond managers to back. – When doing battle in today’s environment, convertible bonds have shown their investment credentials. Their unique ability to transform from debt to equity has meant that for many, they have become the weapon of choice in the hunt for yield.
Morningstar: – How investors got a handle on risk. – Experiencing the ups and downs helped them understand the market–and themselves–better.
ETF Database: – How PIMCO ETFs have handled Bill Gross’s departure. – As many expected, some of PIMCO’s ETFs saw heavy outflows, but the exodus has not been nearly as pronounced as it was for the company’s mutual funds. This table shows the net investing flows of PIMCO’s five largest ETFs since the day that Gross announced he would be leaving.
Businessweek: – Bond index funds are gaining converts. – More investors are hopping on the index-fund trend, and not just with stocks.
— Peter Tchir (@TFMkts) November 17, 2014
Woop Woop – Draghi says expanded ECB bond buying program may include government bonds – (then again it might not)
— Michael Hewson (@mhewson_CMC) November 17, 2014
Detroit has bought itself some time. How much? Chatting with a couple of bankers, I heard 16 months, and 30 months. And thought: That’s it?
— Joe Mysak (@JoeMysak) November 17, 2014
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