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The worlds central banks are planning ahead and intend to cut their exposure to longer-term Treasury debt to protect themselves from losses when the Federal Reserve finally ends its bond-buying this autumn, increasing the risk of instability in global markets. According to the Financial Times.
According to a recent survey of 69 central bank reserve managers, by Central Banking Publications and HSBC, many central banks have already started to move into riskier assets, such as equities. And that trend looks set to continue, with just under half of those polled saying they could envisage buying shares or exchange traded funds. Others said they would cut the duration of their bond portfolios.
While mass bond buying through quantitative easing and cuts in interest rates to record low levels have been credited with staving off another Great Depression, other central banks will be among the biggest losers from the return to normal because many have invested heavily in advanced economy government debt.
While the Fed is the biggest holder of its government debt, it is closely followed by other central banks, which invest a significant slice of their $11.7tn reserves stockpile in the sovereign bonds of the world’s largest economy.
As conservative and secretive asset managers, they have traditionally invested heavily in US Treasuries because the size of the market – the largest and most liquid in the world – gives them quick access to dollars they can sell to stabilise foreign-exchange markets.
Todays Other Top Stories
LearnBonds: – Outperform the pros? Yes you can! – I have heard many pundits say that retail investors should simply invest in broad-market index funds because even top professionals in the business struggle to outperform the indices over the long run. Perhaps that is true regarding stocks. In the world of bonds, however, I think it’s quite easy to outperform the major indices over the long run.
S&P Dow Jones Indices: – Municipal bond market – Readily absorbs a bump up in new issue supply. – Longer dated municipal bonds have outpaced U.S. Treasuries with the S&P Municipal Bond 20 Year High Grade Index returning 12.48% year to date. The 3.75% tax-exempt yield of these bonds remains over 25bps cheaper than the 30 year U.S. Treasury Bond.
Bloomberg: – Oregon senior facility looks east for inaugural bond. – Rose Villa Inc., a retirement community in Oregon, is borrowing in the $3.7 trillion municipal market for the first time with an unrated $62 million offering this week through a Wisconsin authority.
Bloomberg: – Bridges crumble as muni rates at least since ’60s ignored. – No state is needier than West Virginia when it comes to fixing crumbling highways, airports and water works, with annual repair needs of $1,035 per resident that’s three times the national average.
Think Advisor: – Muni bond experts sound short-term warnings on Puerto Rico, long-term on local munis. – Morningstar panel disagree on opportunities in Puerto Rico, but agree that the muni bond world is changing, not necessarily for the better.
Vanguard: – The municipal bond landscape. – Vanguard municipal bond expert Chris Alwine reviews what’s happened in the muni market over the past year and emphasizes the importance of keeping a long-term perspective.
FT: – U.S. develops a taste for Asian bonds. – Debt bankers in Hong Kong and Singapore are having more and more late nights. But rather than wasting the twilight hours at the local drinking hole, many are stuck at their desks waiting for a call from the other side of the Pacific. The reason: success or failure of Asian bond sales – which used to be a predominantly local affair – is increasingly influenced by appetite from credit investors in the US.
Bond Buyer: – New volume edges up to $9 billion. – Issuers plan nearly $9 billion of new long-term financings this week, including a handful of $1 billion deals.
Financial Post: – Bond market has big mom-and-pop problem coming. – It’s never been easier for individuals to enter some of the most esoteric debt markets. Wall Street’s biggest firms are worried that it’ll be just as simple for them to leave.
MarketWatch: – Treasurys mark third week of losses after Fed. – Treasury prices marked the largest three-week loss since December as investors continued to adjust portfolios on Friday after the Federal Reserve reset expectations about monetary policy.
High Yield Bonds
Business Insider: – Investors just threw a ton of money at unusually high-risk bonds for a project that doesn’t make money. – Investors just took on a ton of risk to finance a new Florida passenger railway project being undertaken by Fortress Investment Group, reports Reuters’ Natalie Harrison and Shankar Ramakrishnan.
Morningstar: – High yield bonds not in a bubble but growth is hard to find. – Strategic bond investor John Pattullo of Henderson admits that the opportunity for capital growth in the bond market is falling, but there are still attractive yields.
InvestmentNews: – Emerging-markets rebound hasn’t convinced everyone. – Last month investors sent $45B into emerging markets, the most money to developing countries in 20 months, despite Fed taper.
CNBC: – Top mutual fund managers push emerging markets. – Emerging markets got plenty of love from top mutual fund managers at the Morningstar Investment Conference in Chicago this past week.
Stanford Chemist: – Dividend yield vs. dividend growth revisited – does it matter? – Income investors generally have to choose between high dividend yield or high dividend growth. A simple model reveals no difference in total return in stocks with the same “Chowder number”. Paradoxically, those focusing solely on a growing income stream may actually be better served by investing in high dividend yield rather than high dividend growth.
MarketWatch – How bond investors are hurting themselves. – There’s an old saying that the stock market can remain irrational longer than investors can remain solvent. But when it comes to the bond market and dealing with interest rates, solvency isn’t the issue.
Barron’s: – No exit from bond funds? – A well-thought-out exit strategy is vital to the success of a mission, as the recent events in Iraq demonstrate quite dramatically.
Barron’s: – 6 smart alternatives to junk bonds. – With returns on high-yield bonds hitting record lows, Barron’s hunted for dividend stocks that could prove more rewarding. Some picks: GE, Amgen.
ETF Trends: – Bond ETFs beloved in 2014. – Bond investors are increasingly turning to easy-to-use, cheap and efficient exchange traded funds to get their fixed-income fix.
CNBC: – ETFs for investors who need bond income. – A decade ago, investors were still trying to figure out how to use the first bond ETFs. Three iShares Treasury ETFs and one iShares investment-grade ETF launched in July 2002. Now there are more than 265 bond ETFs and assets exceed $275 billion.
Barron’s: – No exit from bond funds. – In this case, hell could be other investors and a communal desire to jump out of these funds as interest rates rise and prices fall.
Fundweb: – Bond ETFs shatter 2013’s flows by May. – Net inflows into European fixed income ETFs for the year to May have already outstripped 2013’s total inflows by almost 15 per cent.
Income Investing: – Another new unconstrained bond fund, this time from Schroders. – Firms keep adding unconstrained bond funds to their mutual fund offerings, and the newest addition to the unconstrained bandwagon comes from Schroders, which today announced the launch of the Schroder Global Strategic Bond Fund.
Gross: Draghi says LTROs until 12/2016 is a “signal” that policy rates stay low for longer period. #ECB has a “New Neutral” too.
— PIMCO (@PIMCO) June 23, 2014
#Muniland yields via MMD: 10/ 10/ 2.32% 9/ 10/ 2.54% NY/ 10/ 2.39% CA/ 10/ 2.62%
— Cate Long (@cate_long) June 23, 2014
Yuck: US HY spreads under 400bps, 10y AAA muni ratios under 90%, US financial spreads under 100bps, BBB subprime auto ABS at 120bps
— David Schawel (@DavidSchawel) June 22, 2014