Corporate Default Rate Refuses to Flash Red and Today’s Other Top Stories

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Investors are still clamouring for lower rated corporate debt despite analysts raising fears that corporate bonds, particularly those at the lower end of the credit spectrum, are displaying bubble-like qualities.

This is not something that has escaped the attention of many CIO’s, as companies rush to issue more debt to feed the frenzy. So are investors being smart here, or is this a case of the blind leading the blind, in a desperate search for yield?

To see a list of high yielding CDs go here.

The answer could lie in one key barometer for the health of corporate bond markets. The corporate debt default rate. Which despite promises of gloom, refuses to flash red.

Last week, Moody’s reported the global rate at which “speculative grade” companies had defaulted over the past 12 months fell to just 2.3% in the first quarter of 2014, down from 2.9% in the previous three months. This is significantly below historical averages.

So investors can relax right, if interest rates remain at record lows the number of defaults will also remain low. Once interest rates start to climb, this situation could change. But individual investors seem to be of the opinion that rising interest rates are someway off and they will cross that bridge when they come to it.

And they could be right, low growth reduces the risk of central banks raising interest rates in the short term. Even when rates do start to rise, it could take 18 months or more before it manifests itself in corporate credit markets. Giving investors plenty of time to head for the exit.

“The bigger problem is that everyone in the world has taken the same view on default rates – Stephen Antczak, head of U.S. credit strategy at Citigroup told the FT. Everyone is pricing in only a very small rise.”

Any change in sentiment could produce a rush to sell that results in big price falls – especially as markets for corporate bonds are much less liquid than for many other assets. “When might that happen?” he asks. “That is where the doubt sets in. I think it will be more in the future rather than closer to the present.”

So despite displaying distinctly frothy conditions, corporate credit appears to be safe in the short term. But when the tide changes, things could change very quickly. Probably too quickly for most private investors to react.

Think of it this way, you’re in a car traveling at 100 mph, and you know its going to crash. The problem is, you don’t know when. It could be around the next corner, it could be 20 miles down the road.

The way I see it, you have three choices. 1. You can keeping going, blindly ignoring the risks and hope for the best. 2. You can slow down, hoping that will give you more time to react when the problem arrises. 3. You can stop the car and get out, avoiding the accident altogether.

Right now the choice is yours to make. But be aware, if you leave it too long, the market will make it for you.


Todays Other Top Stories

Municipal Bonds

Bernardi Securities: – Detroit settles with UTGO creditors – BOND is right side up! Still “waiting for Godot”. – Last week’s agreement, if approved by Judge Rhodes, is a significant positive step for Detroit and moves the city in the direction we suggested months ago. We are heartened by Mr. Orr’s about face and believe it is exceptionally important to Detroit’s future. His motivations for changing his position are unknown to us and we give him great credit for doing so. In this article, we offer our conjecture as to why he agreed to quintuple his offer to UTGO creditors.

ETF.com: – Kotok on muni outperformance. – David Kotok recently sat down with ETF.com to give us the latest on municipal bonds and where he sees opportunities in the muni market roughly nine months after Detroit’s bankruptcy. He also discusses the importance of being selective in emerging markets investing, and reveals his favorite sector plays at the moment.

Jake Zamansky: – Puerto Rico bond offering: The new ‘at risk’ trade. – Municipal bonds used to be conservative investments sold to Mom-and-Pop, buy and hold retail investors to put under their mattresses for years or even decades. Muni bonds were sold as stable, long-term investments with the clear advantage of generating tax-free income.

MMA: – Its a good time to be selling bonds. – Most bonds in the municipal market rallied late last week and benchmark yields touched 2014 lows. This is an excellent Ɵme for issuers to come to market.

MarketWatch: – Munis rally, but don’t thank fatter state tax coffers. – State tax returns tend to play second fiddle to the federal return on April 15, but the income taxes that state governments take in throughout the year are important parts of their financial health, and in turn the credit quality of the debt they issue.

Mark Conner: – Municipal bond mark-ups: Measuring ‘reasonable’. – The difference between what a muni dealer pays for a bond in the open market and the price at which it might sell that bond to a customer is known as a mark-up. There’s been a lot of talk about muni mark-ups of late, notably in a Wall Street Journal article from March 10.



About.com: – How to use mutual fund flow data to make better decisions. – Those who follow the financial media will often see reports about inflows and outflows from mutual funds and exchange-traded funds. It makes for interesting reading to see what investors are thinking about in a given time period, but the real question for investors is whether fund flows can serve as a predictor of market direction. The short answer: keep an eye on fund flows, but don’t use them as a basis for decision-making.


Treasury Bonds

Arabian Money: – 10-year U.S. treasury bonds are the new fear indicator. – Traders worried about escalating tensions between Ukraine and Russia have turned to 10-year treasury bonds as their main indicator of fear in the markets, veteran trader Art Cashin told CNBC on Monday.

WSJ: – Treasury bonds rebound from earlier decline. – Treasury bond prices rebounded from an earlier decline as rising geopolitical tensions in Ukraine boosted demand for haven assets. In recent trading, the benchmark 10-year note was 2/32 higher, yielding 2.632%, according to Tradeweb. When bond prices rise, their yields fall.


Corporate Bonds

SeattleTimes: – Funds may run from corporate bonds when interest rates rise. – Mutual funds have purchased about half of the company bonds that have been added to the U.S. market since 2008, equivalent to about $1.5 trillion of assets, according to Morgan Stanley.

TabbFORUM: – Solving the corporate bond liquidity puzzle. – Regulatory pressure continues to drive down sell-side market making in the corporate bond market, creating a liquidity crisis for the buy side. While a number of players have been working on platforms to help solve the liquidity puzzle, Sassan Danesh, managing partner, Etrading Software, says the fundamental issue is one of market structure, not technology.


High Yield

Holmes Osborne: – Nuveen junk bonds get a big boost. – It was announced today that mutual fund giant Nuveen will be bought out by TIAA-CREF. TIAA-CREF is a powerhouse in managing retirement funds for teachers and college professors. Nuveen’s junk bonds have risen substantially in today’s trading.

Income Investing: – Citi sours on lowest-rated junk bonds. – Count Citi among the skeptics who think junk-bond valuations are getting too lofty, as Citi downgrades its view on the lowest tier of junk, cutting triple-C bonds to underweight and recommending investors either position more defensively by accepting a lower yield or look elsewhere.

FT: – The strange resilience of junk. – Stock market fashions may come and go – at the moment they are mostly going, as biotech and internet boosters have discovered to their cost – but junk bonds seem able to sail serenely through. At least, so far. As investors dump expensive stocks in favour of cheaper ones, the resilience of junk is surprising.

Daily Wealth: – The sector due for a crash. – Martin Fridson is known as the “dean” of high-yield bonds. And today, he says the outlook for them is terrible.


Emerging Markets

Bloomberg: – Pimco turning bullish on Brazil’s bonds as strength overlooked. – Pacific Investment Management Co., which manages the world’s largest bond fund, is turning bullish on Brazil’s debt markets, saying investors are ignoring the “long-term strength” of Latin America’s biggest economy.


Investment Strategy

LearnBonds: – Has the bond market got it wrong. – For several weeks, media pundits and equity market participants questioned the bond market’s outlook on the economy. Some market participants went as far as to say that the bond market “had it wrong.” This is something with which we vehemently disagreed.

Dallas News: – Rising interest rates won’t kill the bull market, investment strategist says. – Stock investors have become increasingly worried about how the market will react as the Federal Reserve ends its extraordinary bond-buying program. Not to worry, says James Paulsen, chief investment strategist at Wells Capital Management.

Investorplace: – It’s time to sell your bonds. – The rally in bond prices and the drop in interest rates on the 10 year Treasury bond has surprised some investors. After all, it’s a bit counterintuitive to see  interest rates declining even as the U.S Federal Reserve talks about the likelihood of tighter monetary policy and higher interest rates in the next year or so.

CNBC: – Prepare for deeper selloff if this happens. – If yields on benchmark 10-year Treasury bonds dip below 2.6 percent, then the ongoing rout on Wall Street could turn into something deeper, veteran trader Art Cashin told CNBC on Tuesday.


Bond Funds

David Merkel: – Bonds: Size matters. – There have been a few articles recently on Pimco’s underperformance and the increasing concentration on the buy side of the bond market. There is danger, here, for large active managers and their clients.

ETF Trends: – Inside Rising Rate ETF. – One of the most prominent themes in the exchange traded funds industry over the past year has been investors’ increased interest in low duration bond funds as a means of protecting portfolios against what many believe is an inevitable rise in interest rates.

Zacks: – Worried about taxes? Check 3 muni bond ETFs. – Though filing taxes cannot be avoided, one can definitely opt for ways to minimize the tax burden. Some smart investors can use legal measures to make the hole in their pockets a little smaller. “Taxes are the biggest drag on returns,” says Rande Spiegelman, vice-president of financial planning at Charles Schwab.



All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.

Simon G

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