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John Rekenthaler Vice President of Research for Morningstar, has a bad feeling. The bond market has been too quiet for too long. There have been no scandals to get people excited, “It’s been five years since the last scandal, which is a longer-than-usual respite.” He says.
But there is more to this than a feeling in his water. Rekenthaler says that investors are having to use more and more exotic strategies in order to find yield. Add to that, cash is no longer flowing into the bond market like it used to. Many funds are having to compete for what little money there is by promoting higher returns, which are becoming harder to acheive in the current climate.
The global bond market is also changing more than ever before with some major broker dealers exciting altogether. This has had a detrimental effect on bond liquidity. “It wouldn’t take much unusual sales activity for the gears of the marketplace to freeze up, as they did in 2008 during the financial crisis. When liquidity stops, prices plunge.” Says Rekenthaler.
A lot of this is conjecture of course, market conditions could remain healthy, and the bond market may continue to thrive. But what if?
Rekenthaler ends his piece by saying. “I make no predictions. I only say that if I were seeking a bond fund today–which I am not–I would seek a plain, Treasury-heavy fund. Now seems the time for the “risk-off” trade for bonds, as opposed to “risk-on.”
You can read the full story here.
Todays Other Top Stories
CNBC: – Puerto Rico: Sand, rum and some risky bond income. – Puerto Rico is $70 billion in debt; has $37 billion of unfunded pension liabilities, an unemployment rate of nearly 14 percent, and a population of just 3.6 million, which has been on the decline as people and corporations leave the cash-strapped island. So what’s it to investors?
USA Today: – How Puerto Rico’s debt woes affect fund investors. – If you own a tax-free municipal bond fund, you probably own a bit — or a lot — of Puerto Rico’s debt, even if your fund specializes in debt from your home state. So what’s the risk?
Citywire: – Bond star eyes ‘carnage’ hit munis market for $8bn fund. – The municipal bond market is in much better health than investors are aware of due to ‘broad carnage’ created by incidents of US local governments going bankrupt.
DailyWealth: – One of the few legitimate ways to make “free money” in the market. – Dr. David Eifrig shows how to time your entry in one of his top income investments – municipal bonds. Here, you’ll find a classic Doc interview that reveals one of the safest, easiest ways to invest in munis – along with just about any trend.
Bloomberg: – U.S. voters pass $7 billion in muni debt, Nix Astrodome. – U.S. voters passed at least $7 billion of municipal debt while rejecting a new issue to save the Houston Astrodome, the world’s first domed sports stadium, from possible demolition.
InvestmentWatch: – Immense pressure on municipal bonds (waiting for bailout?) – We have seen cities like Detroit and others in California tell their municipal bonds investors, “Sorry, we can’t pay you.” The reason behind this? Their budget deficit was out of control, they reached the breaking point, and they filed for bankruptcy. But the troubles of municipalities and cities aren’t behind us.
Wall St Pitt: – How did UBS recommend Puerto Rico junk for mom and pop clients? – How on earth could trusted, so-called UBS “financial advisors” recommend that conservative and retired investors in Puerto Rico fill their accounts with Muni Bonds which have near junk ratings?
Bloomberg: – Summers sees lack of market confidence in Puerto Rico bonds. – Former U.S. Treasury Secretary Lawrence Summers said financial markets show a lack of confidence in Puerto Rico’s economy, with its bonds trading as the “junkiest of the junk.”
Bloomberg: – Blight-fighting bonds revived in Philadelphia plan. – Philadelphia wants to create its first blight-fighting district in eight years, financed by a type of municipal debt for which sales have dwindled to a fifth of the pre-recession pace.
WSJ: – Think long-term on muni bonds. – Charles Rotblut vice president with the American Association of Individual Investors. Says investors should think long term when it comes to muni bonds.
Learn Bonds: – How a more transparent Fed has increased market volatility. – To investors, volatility is not a good thing. To many analysts, volatility is the definition of risk. The volatility of bond prices is the essence of risk to the investor in bonds because it means that one is never sure what price one might be able to buy…or sell bonds at…if one needs to trade bonds.
WSJ: – U.S. Treasury to introduce floating-rate notes. – The U.S. government on Wednesday set plans to sell a new type of debt that pays more interest as market rates rise, marking its first new product since the introduction in 1997 of Treasury notes that protect buyers against inflation.
Tabb Forum: – Exchange trading of corporate bonds must wait. – Entrepreneurs seeking structural change in the corporate bond market should focus first on creating alternatives to corporate bond mutual funds.
MarketWatch: – Junk bond rebound renews hunt for yield. – Junk bond prices have been creeping higher in recent weeks, prompting some market commentators to suggest risk premiums being paid to holders of the lowest quality corporate bonds are starting to once again look measly.
Investorplace: – Vanguard REIT ETF – High yield, high risk. – Vanguard REIT ETF not one of the better sector offerings at Vanguard.
MoneyMarketing: – The outlook for high yield in a rising interest rate environment. – In an economy with rising interest rates, high-yield credit is usually tipped to outperform government bonds and investment credit and three fund managers give their outlook for the sector. However, with many assets already valued at above redemption values, two managers outline the risks for the sector and a potential alternative option.
DailyFinance: – Baby Bonds: Monster yields with less risk. – Don’t want to stomach the volatility of high-yield business development company stocks like Prospect Capital or Ares Capital? Do you fear Main Street Capital , Fifth Street Finance , or Apollo Investment Corp. might slash their high dividends in the future? There might be a perfect alternative just for you.
Invesco: – Diverging emerging markets: Separating the strong from the vulnerable. – In our view, none of the major emerging market countries is in imminent danger of experiencing a collapse harkening back to the late ’90s (such as the Asian debt crisis, the Mexican Tequila crisis and the Russian default of 1998). However, we do anticipate clear market differentiation among sovereigns going forward, with marked distinctions between strong and vulnerable economies.
The Economist: – Emerging market cause sleepless nights. – After a decade-long boom, emerging markets have flopped and then bounced in the past six months. The gyrations are not over yet
Forbes: – Fidelity throws down the gauntlet for low cost ETFs, 8 to buy. – Long in coming, and tracked, documented and commented upon by me every step of the way, on October 24 Fidelity launched its first fleet of exchange-trade funds: 10 new passive sector ETFs began trading on the New York Stock Exchange.
WSJ: – Long-term mutual fund inflows $5.84 billion in latest week. – Long-term mutual funds rose by $5.84 billion in the latest week on gains to stocks and hybrid funds, according to the Investment Company Institute.
Morningstar: – Will bond funds bring a surprise? – Almost always, when people are very angry at the mutual fund industry, it’s because of bond funds. Stock funds rarely deliver unhappy surprises. Bond funds are a different matter, as they do not behave so predictably.
Income Investing: – Bonds cheer possible Fed rate target change. – Shorter-term government bonds are better this morning amid hopes that the Fed might consider lowering its target unemployment rate that it has said will determine when it will start raising short-term interest rates.
Financial Lexicon: – The case for A 0% bond allocation is weak. – I recently came across an article, advocating 0% investment in bonds. As I clicked the link, I envisioned a rock-solid argument for why investors should allocate no money to bonds. Unfortunately, the article was anything but a rock-solid argument for why a zero percent bond allocation is prudent.
High-Yield spreads closed at 4.66% yesterday after dropping to 4.58% last wk, lowest level since May. Moderation warranted….
— AnthonyValeri (@Anthony_Valeri) November 7, 2013
Amazing how the consensus disproportionately fears rising rates versus falling rates when data paints a diff picture
— David Schawel (@DavidSchawel) November 7, 2013