Chinese Growth Worries Weigh on U.S. Bonds and Today’s Other Top Stories

China rates

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Investors are focused on the end of QE and the effect it will have on bond yields, but the Financial Times reports today that weakening growth across the Pacific may have a much bigger impact on U.S. yields in 2015 and 2016 than the expected pace of US central bank tightening.

China currently holds $4tn of foreign exchange reserves, of which $1.3tn is invested in long-dated U.S. government bonds in 2013, according to US Treasury data. For a long time the threat that Beijing might sell U.S. Treasuries rang hollow, but no longer.

An overvalued renminbi has hurt corporate profits and caused growth to slow sharply over the past two years. An expensive currency in a world of weak demand makes it impossible for China to rebalance its economy without a collapse. Beijing knows this and has intervened in the foreign exchange market to lower the renminbi in a bid to discourage currency speculation and support growth.

But nominal depreciation of just over 3 per cent, coupled with producer price deflation of about 2 per cent, is not enough to eliminate the renminbi’s overvaluation, which we estimate at 15-25 per cent. China needs further renminbi weakness; the question is how to achieve it. More currency intervention risks provoking Washington’s ire. After all, the International Monetary Fund reckons the renminbi is still 5-10 per cent undervalued.

You can read the full article here.


Todays Other Top Stories

Learn Bonds

LearnBonds: – Retirement planning for millennials – Choosing an IRA. – A look at the different options for new investors opening an Individual Retirement Account (IRA).


Municipal Bonds

Business Insider: – The municipal bond world, according to John Derrick. – As we move into the second half of 2014, the Federal Reserve has continued to reduce its stimulus measures intended to boost the U.S. economy. Just last week we heard rumors from Fed officials that if the job market improves faster than expected, key interest rates may be increased sooner than expected.

MarketWatch: – Reynolds American’s merger and a massive fine could snare tobacco muni bonds. – A stream of news out of the tobacco industry has failed to derail prices on municipal bonds backed by cigarette makers. But muni bond analysts warn that investors could get caught in the middle as the big players in the tobacco industry shift.

WSJ: – Losses on Puerto Rico bonds touch some distant muni funds. – Losses on Puerto Rico municipal bonds are weighing heavily on island residents who bought Puerto Rico-focused closed-end bond funds. But municipal-bond investors with no ties to the island also have exposure, through some nationally marketed and single-state muni-bond funds that put a significant chunk of their assets in Puerto Rico debt.

Reuters: – Puerto Rico seeks dismissal of U.S. bond funds’ lawsuit. – The U.S. commonwealth of Puerto Rico asked a federal court to dismiss as premature a lawsuit filed by U.S. mutual funds that sought to strike down a recently enacted Puerto Rican law that the funds said posed a threat to American investors.

White Collar Briefly: – The SEC’s increasing focus on the municipal bond market. – Recent SEC actions confirm that the SEC is making good on its promise to focus attention on the municipal bond market and the disclosure obligations of municipalities.

Bloomberg: – Colorado scores best rally of ‘14 on Denver revival. – Investors looking to tap into the best-performing state in the U.S. municipal bond market barely need to leave Denver International Airport.


Bond Market

Morningstar: – The temptations and dangers of higher-yielding funds. – Predictions of a much-anticipated “Great Rotation” of assets from bonds into equities have fallen flat so far in 2014. However, there has been a smaller but still important shift in the makeup of the bond-fund universe.


Treasury Bonds

WSJ: – Why the world still loves U.S. Treasury debt. –  Last year’s taper tantrum is starting to look like a little footnote in bond market history. Yields on 10-year Treasury notes dropped below 2.5% last week. This is remarkable given the fact that U.S. job growth is heating up, inflation readings firming and the Federal Reserve has said affirmatively that it plans to stop buying U.S. and mortgage bonds by October.


High Yield Bonds

ETF Trends: – ETF chart of the day: Global junk. – Last Friday we profiled several well-known U.S. High Yield Corporate Bond focused ETFs, due to heavier selling activity in the marketplace across a number of products accompanied with redemption activity in most cases.

Bloomberg: – Loan yielding 8 percent drown out Fed’s junk debt warning. – The prospect of 8 percent yields can drown out a lot of warnings when central bankers keep talking up the need for easy-money policies to spur the economy.

Businessweek: – Junk ‘extremely overvalued’ for 9th month, Fridson says. – The high-yield bond market has been “extremely overvalued” for a record nine consecutive months, according to Martin Fridson, a money manager at Lehmann, Livian, Fridson Advisors LLC.


Emerging Markets

Citywire: – Turnaround in Chinese corporate bonds imminent, says Invesco CIO. – Investors can expect improving returns from USD bonds issued by high grade Chinese corporate issuers over the next six months, according to Ken Hu, Invesco’s CIO of Asia Pacific fixed income.

Bonner & Partners: – “Potential trouble” as emerging markets gorge on debt.– It’s not just Senegal hitting the debt jackpot. International sovereign bond issuance by emerging markets hit $69.47 billion in the first half of 2014. That’s a staggering 54% increase over the same period in 2013. And it makes 2014 a record year for emerging market debt issuance. But this is another sign investors are downplaying risk in their reach for yield.


Investment Strategy

Reuters: – Will you get burned by following the hot money in ETFs? – All too often, I see investors heading in the wrong direction en masse. They buy stocks at the top of the market or bonds when interest rates are heading up.

Accuvest: – One chart to watch: High-yield bonds vs. S&P 500 index. – Since June, high-yield bond prices and credit spreads have signaled increasing distress in the credit markets. Recession risk is low, and upward pressure on interest rates is only modest. If high-yield bond prices do not stabilize, the probability of a meaningful correction in equities increases.

PIMCO: – Is timing everything? Practical implementation of tail risk hedging​​. – “Just in time” hedging is nearly impossible: By the time an investor decides to hedge, the market may already price in the significant risk of a tail event. Instead, hedges could be included as a permanent part of an asset allocation: what we might call “just in case” hedging.

Trustnet: – Why own bonds when yields are low? – Equities may well return more than bonds over the next decade, but fixed interest has much more to offer than simply capital appreciation.

ETF.com: – Kotok: Why I’m buying utilities; avoiding high-yield debt. – David Kotok is the chairman and chief investment officer of Cumberland Advisors, a registered investment advisory firm based in Sarasota, Fla. sat down with ETF.com to give us the latest on Puerto Rico and its potential implications in the municipal bonds market. He discusses high-yield debt and gives us his current favorite fixed-income and equity plays.

Motley Fool: – Which of these 3 high-yielding REITs is best for your portfolio? –  All three of these REITs have managed to steadily grow funds from operations, or FFO, which are used to pay investors a competitive dividend while maintaining a healthy balance sheet. However, a closer look may reveal some important differences when it comes to choosing the right dividend stock for your portfolio.


Bond Funds

Forbes: – Best ETFs for traders: Inflation-protected bonds. – Do you want to speculate on where real interest rates will go? You could buy one of the cost-efficient exchange-traded bond funds in the table below. If rates on Treasury Inflation Protected Securities (a.k.a. TIPS) go down, you’d make a quick buck.

Investment News: – Fixed-income ETFs continue to build off 2014’s fast start. – Fund groups of all stripes did well in the second quarter, despite the U.S. economy facing mixed results.


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