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ECB Prepared to Buy Sovereign Bonds and Today’s Other Top Stories

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European Central Bank Vice President Vitor Constancio gave the strongest signal yet that the ECB is prepared to buy government bonds early next year if it decides that more aggressive stimulus measures are needed.

Speaking at a conference in London, Mr. Constancio rebutted critics of bond buying who argue that central bank purchases of government debt would be ineffective in the eurozone and would undermine efforts by governments to reform their economies.

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His remarks appeared to play down mounting hopes in financial markets that the central bank would step up its stimulus drive as soon as its policy meeting on Dec. 4. but provided greater assurance that public debt buying is likely early next year, analysts said.

“During the first quarter of next year we will be able to gauge better” whether current programs, which include cheap bank loans and purchases of covered bonds and asset-backed securities, will be sufficient to raise the ECB’s balance sheet—the value of assets it holds-—by as much as €1 trillion ($1.24 trillion).

“If not, we will have to consider buying other assets, including sovereign bonds in the secondary market, the bulkier and more liquid market of securities available,” he added.

“The ECB is very well down the road preparing arguments for sovereign [quantitative easing],” said Ken Wattret, economist at BNP Paribas . Quantitative easing refers to broad-based purchases of assets by central banks including government bonds.

“It is now more a matter of when rather than if” the ECB buys government bonds, said Nick Matthews, economist at Nomura.

 

Todays Other Top Stories

Municipal Bonds

Governing: – Are muni bonds being replaced by direct loans? – Earlier this year, Wisconsin pulled off a fancy financing maneuver designed to avoid an expected increase in interest rates. Rather than waiting until next year to go to the municipal market and refinance a certain set of bonds, the state got a $278 million loan secured directly from a bank. In doing so, Wisconsin locked in 2014’s lower interest rates and can pay off bondholders next year with the proceeds.

Reuters: – Muni sales total $27.8 bln in November, $278 bln so far in 2014. – U.S. municipal bond sales totaled $27.8 billion in November, pushing 11-month volume to $278.3 billion, just 3.3 percent less than the same period in 2013, according to Thomson Reuters data on Wednesday.

 

Bond Market

Reuters: – U.S. bond futures, ETF volume jumps, boosts prices. – A mid-afternoon flurry of buying in long-dated U.S. Treasury futures and exchange-traded funds pushed prices to session highs on Tuesday.

Bloomberg: – Bye-bye bond dealers? Investor-to-investor trading gains. – Bond markets are seeking other ways to trade bonds outside of banks, as investor-to-investor trading gains strength. Bloomberg’s Lisa Abramowicz reports on the new market makers in bond trading on “Market Makers.”

Pensions and Investments: – All risks are not created equal. – Investors who have relied on quantitative easing as the basis for many of their investment decisions have been well-rewarded. Further, the riskier the assets, the stronger the performance has been. During this period, bad news for the economy has been viewed as good news for the markets given it meant either an increased level or extended period of stimulus. We believe investors’ views today are in the process of changing. Investment decisions, at least within the U.S., must again stand on their own merit, not central bank support.

Every Investor: – Bond markets: an oily mess. – The price of oil has collapsed, creating a number of winners and losers across bond markets. But the long-term implications are far more important.

 

Treasury Bonds

Reuters: – U.S. yields drop on weak U.S. data, continued low euro zone rates. – Benchmark U.S. Treasury yields fell to their lowest levels in over a month on Wednesday, while long-dated yields also hit fresh over one-month lows, on weaker-than-expected U.S. economic data and continued low yields in Europe.

 

Investment Grade

Bloomberg: – High-grade bond issuance surges to record $1.15 Trillion. – Investment-grade corporate debt sales have surged to a record $1.15 trillion this year as the most creditworthy borrowers flocked to the U.S. bond market to take advantage of historically low interest rates.

 

High Yield Bonds

IFR: – Springleaf Finance sole deal in US high-yield. – The US high-yield new issues market slowed to a trickle on Tuesday, with just one deal for Springleaf Finance Corp expected to price ahead of the Thanksgiving holiday.

Bloomberg: – Junk-loan volume plunges as yields rise. – Leveraged loan issuance plummeted in the U.S. this month as investors punished borrowers in an increasingly volatile market for high-yield, high-risk debt.

Bloomberg: – High-yield bubble absent as U.S. stocks rally. – The failure of high-yield debt to keep pace with second-half gains in U.S. stocks shows the bonds aren’t as expensive as some might suggest, according to Michael Darda, MKM Partners LLC’s chief economist and market strategist.

 

Emerging Markets

Market Realist: – Why emerging market bonds have seen inflows in 2014. – Emerging market bonds have been one beneficiary of today’s low yield environment. As investors casted a wider net for income, flows into emerging market bond exchange traded products (or ETPs) doubled from 2011 to about $6 bn last year. But now, after emerging market bonds’ rally, is it too late to allocate to this asset class?

Pan American World: – Foreign investors reduced holdings in Mexican corporate bonds. – Foreign investors trimmed their holdings of Mexican corporate securities in the third quarter and sharply slowed their purchase of government debt due to worries about global growth and uncertainty over central bank policy in advanced economies, the central bank said on Tuesday.

 

Investment Strategy

Market Realist: – Emerging versus developed market bonds: Which should you choose? – EM debt generally now offers higher yields than developed market bonds. And while emerging market debt yields have dropped in recent years, the size of the drop has been much less precipitous than that of developed market yields. In addition, emerging market bond spreads are still wide relative to U.S. Treasuries. This means there’s further room for spread compression as emerging market asset quality and fiscal credibility continue to improve.

Income Investing: – Four best places to stash cash and still earn yield. – Even supposedly “safe” options for investing cash are no longer either clear-cut or risk-free. Short-dated bond funds have become popular among investors who fear rising rates, but even those are not without risk, as short-dated Treasury notes could be hit hardest by rising rates. Here are four good options for investors.

 

Bond Funds

Morningstar: – Should investors be thankful for interest-rate-hedged bonds? – Investors are likely better served by traditional bond funds.

About.com: – How do currency movements affect internatioanl bond funds. – There are a wide range of factors that can affect the performance of your bond funds, but the impact of the changing value of the U.S. dollar is underappreciated and frequently misunderstood.

CNBC: – Mass exodus from bond funds isn’t likely. – In the middle of December, we will be treated to an updated version of one of the greatest stories ever told, the Exodus of the Israelites from Egypt who were led from bondage by their warrior/prophet, Moses.

 

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