Chase Unicorns, Not Yields and Today’s Other Top Stories

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Joshua M Brown, better known as the Reformed Broker is one of the most well respected bloggers and financial gurus around. Although I suspect he hates being called a guru.

So when he writes, its as well to take notice. In todays post he talks about investors insatiable appetite for yield.

“The combination of bond market refugees looking for bond-like equities along with the influx of flows into so-called “minimum-volatility” funds and ETFs led to an overvaluation in the high-dividend equity space, an excess that the market spent the majority of 2013 working off.” Says Josh, who went on to say. “This chase for yield in the stock market led to the same thing that all such chasing always leads to – underperformance.

Although he’s mainly talking about equity markets, what he says is relevant to bond market investors as well. Yield-chasing never ends well, regardless of whether it happens in stocks or bonds. It’s only ever a question of who’s left holding the bag at the inflection point.

You can read the full article here.


Todays Other Top Stories

Municipal Bonds

InvestmentNews: – UBS Puerto Rico closed-end muni investors losing billions. – Investors in the beleaguered UBS Puerto Rico family of closed-end municipal bond funds are losing billions.

Morningstar: – Municipal bonds still worth a look. – With a tilt toward longer durations, worries over Puerto Rico, and large outflows, muni funds struggled in 2013, but they have something to offer investors, says Morningstar’s Eric Jacobson.

Cate Long: – Selling Puerto Rico Cofina 3.0. – Puerto Rico has announced it intends to sell a Cofina 3.0 bond in January or February. The most important question is whether there is sufficient new Cofina tax collections to support it. Will Puerto Rico be willing to pay market rates above 8.5 percent to sell Cofina 3.0?

WSJ: – Rules to curb muni-bond advisers. – U.S. securities regulators, under pressure from Congress to prevent a repeat of financial debacles in municipalities like Detroit and Jefferson County, Ala., are set to propose a series of rules to rein in advisers that help states and localities raise cash in the $3.7 trillion municipal-bond market.


Treasury Bonds

Reuters: – Speculative net shorts in U.S. T-note futures grow. – Speculators’ net bearish bets on U.S. 10-year Treasury note futures grew in the latest week on worries over how quickly the Federal Reserve might pare its bond purchase stimulus, according to Commodity Futures Trading Commission data released on Monday.

Charts Etc: – Hedgers are getting long Treasury futures. – Commercial hedgers, typically the smarter money, are currently very long the UST note, attaining their highest level of long exposure in years. In the past, when their exposure has reached elevated levels (beyond 200K, green horizontal line), the UST note has more often than not responded by rallying. If that were to happen in the near future, I would expect equities to stall or retreat in kind.


Corporate Bonds

FT: – Companies ride global wave of bond issuance. – Global corporations are rushing to raise the first batch of funds in 2014, in a wave of new bond issuance that may push total sales in the U.S. this week over the $30bn mark.

BusinessWeek: – FedEx sells $2 billion of debt in three parts. – FedEx Corp. the world’s largest cargo airline, sold $2 billion of bonds in three parts to accelerate a share-buyback program. A gauge of U.S. corporate credit risk held at about the lowest level in six years.

Donald van Deventer: – Verizon Communications inc. bonds: The second time is not the charm. – We believe that Verizon Communications Inc. would be judged “investment grade” by a majority of analysts. Our second conclusion is the opposite of our judgment in September. From an investor value perspective, we look at the ratio of credit spread to default probability. By this measure, Verizon Communications Inc. bonds now offer below average value, compared to the above-average value indicated by market prices in September.


High Yield

Safety in Value: – How to make money in junk bonds (book review). – Robert Levine wrote “How to Make Money in Junk Bonds” as an introduction to junk bonds and to provide a method for selecting junk bonds in which to invest. The book provides an introduction to credit analysis, which is drastically different than equity analysis, because the upside is capped. This is done both with parable type stories and also with direct explanations.

Barron’s: – Time to dump junk bonds. – Bond Blogger Michael Aneiro says high-yield may keep on chugging in the near term, but sees danger in the distance.


Emerging Markets

SFGate: – Goldman to JPMorgan say sell emerging markets after 2013 tumble. – Wall Street’s biggest banks say the slump in emerging-market assets that left equities trailing advanced-nation shares by the most since 1998 last year will prove more than a fleeting selloff.

FT: – EM bonds: conflict of interest. – Going against the crowd is a thrill – if you turn out to be right. After a great decade, emerging markets have underperformed for well over a year. Time, then, for a bold call on emerging market bonds?


Investment Strategy

InvestmentNews: – It’s time to rethink bond allocations. – With bond yields near historic lows and poised for a cycle of rising interest rates now that tapering is set to begin, financial advisers might do themselves a favor by looking once again to institutional investors for guidance.

ValueWalk: – How to use bond ladders in retirement portfolios. – Should bonds be kept in mutual funds or purchased as individual securities and held to their maturity dates? The former option receives much far more attention, as managers compete in a performance-driven marketplace. But investing, especially for retirement, shouldn’t be driven by maximizing risk-adjusted returns. Advisors must focus on securing a client’s future spending needs. I will investigate the role of bond ladders in retirement and which ladder length is best for clients.

CityAM: – Position your portfolio for a cautiously optimistic 2014. – Bonds remain expensive but cannot be avoided. We recommend sticking to top quality government bonds like UK gilts, German bunds and US treasuries. High quality short-dated corporate bonds could be an alternative, and offer better returns than cash on deposit. But investors should avoid taking significant credit risk and interest rate risk, and should remember that chasing yield or income in the bond market is the worst thing possible.

Brian Romanchuk: – Do bonds make sense for long-term investors? (Part I). – In this article, I look at why long-term investors would want to hold investment grade bonds in their portfolios. The main justification I see is uncertainty about equity returns, but it is unclear whether this is enough to justify a significant bond weighting in bonds in the policy portfolio. I will cover other less obvious reasons to hold bonds in a follow up article.


Bond Funds

WSJ: – Bond ETFs grabbed money last year even as bond mutual funds suffered. – A down year for the bond market drove investors from traditional bond mutual funds, but money kept flowing into bond exchange-traded funds.

BreakingNews: – Bondholders may be forced to fix liquidity crisis. – With bond yields near historic lows and poised for a cycle of rising interest rates now that tapering is set to begin, financial advisers might do themselves a favor by looking once again to institutional investors for guidance.

MarketWatch: – Yield-hungry investors aren’t ready to dump bonds. – What if waiting for the much-anticipated “Great Rotation” to stocks from bonds was like Samuel Beckett’s “Waiting for Godot?” Or the “Great Pumpkin?”

Portfolio Adviser: – Maturity decision key for bond investors in 2014. – 2013 might not have been the apocalyptic year for bonds foreseen by many, but the maturity decision mattered. While longer-dated bonds saw significant sell-offs, shorter-dated bonds fared reasonably well. Is this likely to be the right decision again in 2014?

Dr Ed’s Blog: – Buybacks, great rotation, and melt-up. – Until last year, retail investors didn’t believe that the bull market in stocks was sustainable. Instead, they chose to buy bonds. From 2009-2012, bond mutual funds attracted $1,372 billion in net inflows. Over that same period, equity mutual funds had net outflows of $75 billion.

Income Investing: – Citi: Bonds look bad for next decade or so. – Citi Private Bank released its 2014 outlook today, and it doesn’t have many nice things to say about bonds. Citi says stocks still have room to run even after last year’s outsized gains, but bonds are going to be stuck in a rut for a while.


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