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Emerging markets have suffered a torrid year, the sell-off started in the summer when rumours began spreading that the Fed was about to begin scaling back its massive stimulus program. Emerging market bonds have been in decline ever since and show little sign of recovery, despite a more dovish tone coming out of the Fed.
Many analysts and investors are worried. Yellen should be good for emerging markets, her dovish tone is just what’s needed to allow EM bonds to get back to the level they were at before the summer sell off. But so far that doesn’t appear to be happening.
“It is concerning, to be frank,” Christian Keller, a senior strategist at Barclays, told the Financial Times. “How much more help can you get? There has been so much dovish news from the Fed, and still they can’t rally.”
And it could get worse before it gets better, as Barclays reports that EM Bond issuance may hit a record in 2014. Barclays expects emerging markets to issue around $94 billion hard currency government debt next year, in an effort to shore up their foreign reserves as their current account buffers shrank since this summer’s sell-off.
This clouds the markets for EM bonds says Shuli Ren, emerging markets reporter at Barron’s. “The iShares JPMorgan USD Emerging Markets Bond ETF (EMB) is already down 11.8% this year. Additional supply next year is likely to put a lid over the valuation of this benchmark bond index.”
Todays Other Top Stories
Reuters: – Fitch may cut Puerto Rico’s bond rating to junk. – Fitch Ratings said on Thursday it may soon strip heavily indebted Puerto Rico of its investment grade credit rating, threatening to tag the U.S. territory as the largest municipal bond issuer to date to tumble into junk bond territory.
WSJ: – Supreme court to review muni-bonds case. – If you invest in state and local government bonds, keep an eye on an important tax case heading to the U.S. Supreme Court.
WSJ: – Bankrupt Jefferson County to sell $1.7 billion of debt. – Jefferson County, Ala., is planning a $1.7 billion debt sale next week, challenging the market maxim that a bankruptcy filing leaves a permanent stain on municipal-bond issuers.
Income Investing: – Now back in the muni market: Jefferson county. – Here’s the most interesting muni-bond deal you’re going to see this month. Jefferson County, Ala. is trying to emerge from Chapter 9 bankruptcy protection (the muni market’s answer to Chapter 11) by selling new bonds to pay off the old ones that forced it into bankruptcy in the first place.
BusinessWire: – Fitch takes various rating actions on enhanced municipal bonds and TOBs. – Fitch Ratings has taken various conforming rating actions on enhanced municipal bonds and tender option bonds (TOBs) corresponding to actions taken on their associated enhancement providers or underlying bonds.
MuniNetGuide: – Seeking salvation in high yield munis. – Janet Yellen’s confirmation hearings went swimmingly yesterday, allowing 10-year Treasury yields to rally to around 2.70%. Municipals also rallied in tandem, with yields on the long end declining by three basis points.
BusinessWeek: – U.S. Yield gap widens to 2-year high as Yellen backs stimulus. – The difference between Treasury five-year and 10-year notes yields widened to the most in more than two years as Federal Reserve Chairman-nominee Janet Yellen told Congress she will promote the Fed’s unprecedented stimulus program until economic growth is stronger.
MyDesert: – Has global money supply outstripped investment opportunities? – In the immediate aftermath of the partial U.S. Government shutdown, an unusual amount of money flow seemed to return to the U.S. Treasury’s weekly auctions. This brought the yield of the focal 10-year U.S. Treasury bond down to under 2.5%, the lowest level since early last summer.
FT: – Treasury ownership marks wealth divide. – Who owns America’s ever-swelling pile of government debt? This is a question that has provoked considerable angst among US politicians recently; or at least it has in relation to national identity.
MarketOracle: – Why banking, corporate America and the Government need each other. – It should not come as a surprise that banking, industry and government are closely connected. The recent draconian decisions of the US Fed or the US foreign policy towards the Middle East are obvious examples. In order to understand who is behind most of those decisions and who the beneficiaries are, one should go back in history to the end of the 19th century.
WSJ: – Companies sell bonds at fastest pace on record. – Highly rated companies are selling bonds in the U.S. at the fastest pace on record, with total bond sales for 2013 surpassing $1 trillion, data provider Dealogic said.
Petunia Bounce: – Some great benefits of High-Yield Investment. – High-yield investment could prove to be very worthwhile for people. While there’s a quantity of risk involved in high-yield bonds investments, they can also be very profitable for investors if they are focused towards companies that have the potential to recover from their financial instability.
BusinessWeek: – Bond sales in U.S. drop 46% to $22 billion as spreads widen. – Corporate bond sales in the U.S. dropped 46 percent this week, falling to the least in a month, as relative yields widened.
US News: – Best corporate bond mutual funds. – Find the top rated Corporate Bond mutual funds. Compare reviews and ratings on Corporate Bond mutual funds from Morningstar, S&P, and others.
Financial Post: – Moving deeper into high-yield bonds. – Sandy Liang has been positioning the Aston Hill Strategic Yield Fund for rising interest rates over the past year, which is reflected in the fund’s current weighting of more than 80% in high-yield bonds.
ETF Trends: – Sidestep rate risk with this high yield bond ETF. – A look at the ProShares High Yield-Interest Rate Hedged ETF. Investors who are still looking for yields but are wary about rising rates can find that this ETF could fit the bill.
WSJ: – Outflows from emerging-market bond, equity funds accelerate. – Outflows from bond and equities funds in emerging markets accelerated sharply in the week ending Nov. 13 due to uncertainty over when the Federal Reserve will start pulling back from its post crisis stimulus measures.
IFR: – EM high-yield: It pays to be wary. – The European high-yield market has snapped up a spate of emerging markets corporate bonds in recent weeks, but some investors risk making costly errors in their rush to buy.
Artemis: – October cat bond issuance stimulates secondary portfolio rebalancing. – The two catastrophe bonds issued during the month of October went some way towards satisfying a little of the excess demand for insurance-linked securities (ILS) and as a result stimulated some rebalancing of investors secondary cat bond portfolios during the month.
Learn Bonds: – Nobel Laureate + Bond Guru = The DoubleLine Shiller enhanced CAPE fund. – The DoubleLine Shiller Enhanced CAPE Fund is an equity fund that combines the investment strategies of both Jeff Gundlach and Robert Shiller. Witnessing a need for sector selectivity in the stock market, and basing this selectivity on Robert Shiller’s Cyclically Adjusted Price-to-Earnings Ratio, the fund’s primary objective is to purchase equity derivatives of the most undervalued sectors in the stock market, and park the net assets in debt instruments.
Winnipeg Free Press: – Investing in bonds — not as simple as you think. – So, let’s say I am a conservative investor with a primary goal of capital preservation. As a result, I invested 70 per cent of my RRSP into a number of government bonds because I did not want to take any risks.
Kiplinger: – What ‘new normal?’ El-Erian Pimco fund falls flat. – He and Bill Gross make up the most formidable pair of bond investors in the world. But El-Erian hasn’t had much success running Global Multi-Asset Fund.
Gary Gordon: – Is the Fed capable of slowing an exodus from bond ETFs? – The familiar pattern of May-June gloom for stocks only led to a 5% sell-off in 2013. Bonds, however, witnessed a repricing that many had not seen since 1994. Intermediate-term treasuries lost 7% to 8%. Munis fell more than 10%. Meanwhile, investors trampled emerging market bonds for 12%-14%.
Minyanville: – Pimco: An investment approach that digs deeper into global inflation-linked bonds. – When investing in inflation-linked bonds across the globe, it may be tempting to simply favor markets with high real yields, or to pick up yield either through maturity extension or by leaving currencies unhedged. But we think valuation decisions require a more nuanced approach, mixing a little bit of art and science.
Yahoo Finance: – Bill Gross is buying these bonds. should you? – Pimco’s Bill Gross is buying shorter-term bonds, betting that when Fed tapering happens, it will happen to long-term bonds. Is he right?
Nelson Smith: – 5 closed end funds offering 7% tax free yields. – Here are 5 closed end funds that all hold muni bonds, and all use leverage to enhance their returns. Thanks to the market getting spooked by potentially rising rates, these have all fallen to close to 52 week lows, giving investors an opportunity to get yields approaching 8%. Leverage does add risk, giving investors a double amount of hurt if things go badly.
WSJ: – Two tools for inflation protection. – The stock market provides some protection against inflation. But that protection is far from perfect. Treasury inflation-protected securities (TIPS) and I-Bonds protect against inflation, though current yields are low.
John Mason: – Bond market bubble? – Janet Yellen, in her testimony in front of Congress yesterday, argued against a stock market bubble. While this is debatable at this point in time, one now must question whether or not there is a bond market bubble taking place underwritten by the Federal Reserve.
WSJ: – Short-term bonds gain traction with advisers. – To guard against rising interest rates, several veteran fixed-income managers say they’ve started to get aggressive again by purchasing more short-term bond funds. They favor corporate bond funds to cushion portfolios.
BusinessInsider: – OppenheimerFunds Expert: Government-related bonds are the worst hedge against rising interest rates. – When interest rates go up, bonds prices fall. As part of the “Ask A Financial Expert” video series, OppenheimerFunds Senior Economist Brian Levitt discusses how investors can offset some of the losses that can be incurred by bonds.
Potential municipal bond volume for next week should total $7.91B, from $4.86B this week, per Ipreo, The Bond Buyer and Thomson Reuters.
— James Ramage (@RJamesRamage) November 15, 2013
5yr CDS spreads of the big banks are all tighter this morning despite Moody's ratings downgrade. No surprise.
— AnthonyValeri (@Anthony_Valeri) November 15, 2013