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Ultra-loose monetary policy has pushed investors en masse to take risks that they otherwise wouldn’t be comfortable with. The WSJ reports that this has led to some trades becoming “crowded,” (subscription) and thus potentially vulnerable to sharp reversals if the assumptions underlying them prove false.
This is borne out by the recent slump of the European high-yield bond market, which has already felt the impact of a reversal, sparked in part by concerns about U.S. rates and in part by idiosyncratic problems like the collapse of U.K. mobile-phone retail chain Phones4u.
To see a list of high yielding CDs go here.
The big concern, which has yet to be tested in earnest, is that fixed-income markets will be unable to cope with outflows of any size as regulation has crimped the ability of banks to trade bonds.
So far, betting against central banks has been unwise: if markets have pulled back, it has been a good idea to buy at lower prices as policy makers have acted to reassure investors. But with the growth outlook rocky and central-bank support diminishing, that might no longer be true.
Riding with the herd has been profitable. But when the herd turns, investors should beware getting trampled.
Todays Other Top Stories
Learn Bonds: – A 6% yielding bond from a company you’ve overlooked. – Why might many investors have overlooked the 2024 notes and other R.R. Donnelley bonds?
WSJ: – Puerto Rico sells $900 million of short-term notes. – (Subscription) Puerto Rico sold $900 million of short-term notes bearing interest rates of as much as 7.75%, its first debt offering since the passage of a law paving the way for a possible restructuring of some of its agencies’ obligations.
Bloomberg: – Jefferson county fights to keep sewer bond increases. – Jefferson County, Alabama, wants the U.S. Court of Appeals to allow an appeal immediately from a decision in federal district court last month that riled Wall Street by raising the specter that some collateral given for newly issued sewer bonds could be taken away.
ETF Trends: – Muni bond ETFs maintain strong fundamentals. – Tax incentives and a shrinking supply of new debt issuance help municipal bond exchange traded funds march higher, with muni yields falling to a 16-month low.
Bloomberg: – Pimco to Barclays: Your bond index is hurting investors. – Barclays Plc (BARC) is pressuring investors to hold expensive mortgage securities by filling its closely followed bond index with debt the Federal Reserve has been gobbling up, according to Pacific Investment Management Co.
WSJ: – ECB’s Draghi sees no bubble in eurozone government bond market. – (Subscription) European Central Bank President Mario Draghi said on Saturday that he sees no major risks of a bubble in eurozone government bond markets, suggesting he doesn’t expect instability to impede possible sovereign bond purchases by the ECB.
FT: – If you believe the bond markets, we are all Japanese now. – (Subscription) Low yields have an easy explanation: declining growth and low inflation, writes Peter Tasker.
Risk.net: – Large hedge funds highly exposed to asset-backed securities. – Thirty of the biggest hedge funds in the world have large exposures to asset-backed securities (ABS) and US junk corporate debt, according to portfolio stress tests conducted by eVestment.
Bloomberg: – U.S. two-year notes poised for biggest weekly gain since 2011. – Treasuries gained, with two-year yields set for the biggest weekly drop in more than three years, as investors pared expectations for interest-rate increases after the Federal Reserve highlighted risks to the U.S. economy.
WSJ: – U.S. government bonds gain as global stocks sell off. – (Subscription) U.S. Treasury prices were higher on Friday as selling pressure hit global stock markets, setting up the 10-year yield for its longest streak of weekly declines since January.
Reuters: – Spin-offs add to high-grade woes. – The investment-grade bond market has been slammed with another wave of bondholder-unfriendly news, with spin-off announcements from Hewlett-Packard and Symantec and activist pressure on EMC Corp to follow suit.
High Yield Bonds
Bloomberg: – Dynegy sells $5.1 billion in junk bonds as yields rise. – Dynegy Inc. (DYN) sold the biggest U.S. junk-bond offering since April’s record deal by billionaire Patrick Drahi just as borrowing costs for speculative-grade firms climb to the highest in almost a year.
Income Investing: – High yield bonds rebound as stocks stabilize. – The high yield bond market is having a calm day as stocks settle down (although equities are still declining a bit) Monday. Junk bonds essentially represent the bond market’s version of the stock market, so while stocks have been on a volatile downward ride over the past week, high-yield bonds have likewise suffered, even as the Treasury market has mounted yet another improbable rally that’s pushed the 10-year Treasury yield to a 16-month low of 2.286%.
Forbes: – Is this the start of the long-awaited correction or something even worse? – High-yield or “junk” bonds have been influencing equities quite a bit in the past few months after their sharp sell-offs in July and September. The closely-watched high-yield bond ETF (symbol: HYG) is sitting above a key support level at $90.50. A solid break below this level would increase the chances of further bearish action in both junk bonds and U.S. equities, though a bounce is possible from here if the support holds.
FT: – Investors desert European high-yield bonds. – (Subscription) Demand for European high-yield corporate bonds has slumped as investors have become warier of holding risky assets amid mounting concerns over the global economy and the outlook for the eurozone.
ETF Trends: – Oil slicks for junk bond ETFs. – Of the 25 worst-performing exchange traded funds over the past month, 12 are equity-based energy funds. However, weakness in the energy sector could be problematic for some an asset class some investors may not be overlooking as a victim of energy’s slide: High-yield bonds and the corresponding ETFs.
NY Times: – In emerging-market bonds, political risk is a constant. – When Argentina defaulted on its sovereign debt in July, investors seemed to shrug. Money kept flowing into mutual funds and exchange-traded funds that invest in emerging-market bonds, as it has for much of the last five years.
Emerging Markets: – Even a gentle Fed could savage EM bonds as banks’ liquidity vanishes. – Emerging market bond markets may be heading for serious disruption in coming months even if the US Federal Reserve raises interest rates slowly and gently, bankers warned yesterday.
Financial News: – Investor interest helps green bonds grow. – When asset owners and fund managers with combined assets of $2 trillion under management make a commitment, it carries some weight.
AllianceBernstein: – Five ways to keep out of the bond liquidity trap. – Bond investors are used to managing interest-rate risk and credit risk. But the financial crisis should have taught us that there are times when liquidity risk can be just as important to manage. Now is one of those times.
Michael Hooper: – A profitable bond trade that can be repeated. – While I can’t predict the direction of interest rates, I can buy investment-grade bonds with the idea of holding them to maturity. I collect the interest payments in my brokerage account, and say thank you very much for that steady income.
U.S. News: – Retirees should invest for total return. – These low returns have left retirees choosing to live off of less income or to invest in assets with a greater potential for loss. If you prefer a stable income without relying on interest earned or excessive risk, you need to invest for total return.
The Motley Fool: – 7 Investing disasters and how to prevent them from happening to you. – Because we’re going to talk about risk — about all the things that can go wrong with your investments and ruin your near- and long-term financial plans. While thinking through this stuff isn’t all rainbows and cupcakes, it’s better to confront the potential grim side of realitynow so that you can take pre-emptive action.
Investors.com: – 5 top bond mutual fund categories aren’t the biggest. – The top-performing bond mutual funds this year and for the past five years aren’t the ones where investors have invested most of their assets.
Reuters: – U.S. ETFs to take aim at China’s onshore bond market. – U.S. investment firms are readying the first line of exchange-traded funds designed to give American investors access to China’s swelling onshore bond market, which has been largely closed off to foreigners.
Zacks: – 5 strong buy government bond mutual funds to bet on. – We share with you 5 top rated government bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all government bond funds.
WSJ: – Fund traders dig deep for bonds. – (Subscription) Weeks of persistence paid off for BlackRock Inc. BLK -0.41% bond trader Iseult “Izzy” Conlin in mid-August, when one of her computer screens flashed, flagging a $2 million block of SunTrust Banks Inc. STI +0.70% bonds that had just gone on sale.
Think Advisor: – PIMCO’s Q3 outflows top 5% of assets. – PIMCO’s assets under management fell 5.17% in the third quarter, according to figures the firm released on Friday. As of Sept. 30, the fixed-income shop had $1.876 trillion in AUM vs. $1.973 trillion on June 30, which represents a drop of $97 billion.
ETF.com: – Bill Gross & the Janus problem. – Bill Gross did his first town hall meeting last Thursday, and by all accounts he’s settling into his new job doing exactly what he’s always done very nicely. Hey, that’s awesome. I’m glad Bill’s happy. I generally think people should do what they love and be happy and all that. But as an investor, the move to Janus is a step backward.
Reuters: – Janus makes foray into ETFs with VelocityShares deal. – Janus Capital Group Inc, fresh from hiring bond star Bill Gross, said on Monday it plans to make its first foray into the $1.8 trillion exchange-traded funds (ETF) space through the acquisition of VelocityShares parent, VS Holdings Inc.
US Treasuries closed today in observance of Columbus Day but 30-yr Treasury futures price up nearly one point.
— AnthonyValeri (@Anthony_Valeri) October 13, 2014
Peter Thiel sees distortions in: “bonds, corp bonds, stocks that pay high dividends…. housing… But tech stocks are quite different.
— Sara Eisen (@SaraEisen) October 13, 2014
— Chris Ciovacco (@CiovaccoCapital) October 13, 2014