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The Federal Reserve ended its will they won’t they, taper dance today when they finally announced that they will begin paring back the amount of bonds they purchase as part of their ongoing monetary stimulus program formally known as QE.
Starting in January, the Fed will taper its Treasury purchases by $5bn to $40bn a month, and its mortgage-backed securities purchases by $5bn to $35bn a month.
Shortly after the announcement yields on the U.S. 10-year note increased five basis points, or 0.05 percentage points, to 2.88%. Nothing major and a sign that the market had already priced in a small taper.
The central bank also announced that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5%, so long as the outlook for inflation is no higher than 2.5%.
The panel added that it “likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below” the Fed’s 2 percent goal.
The news will be a big relief for bond investors who were stung after the Fed mislead investors with a time line for tapering its stimulus, back in September. The Federal Reserve is now stressing that any reduction in bond purchases will depend on the economic outlook — and its apparent from todays market action that the message is finally sinking in.
Todays Other Top Stories
ValueWalk: – Muni bonds yields drop despite heavy issuances, doubled outflows. –Muni bonds ought to have had a rough week, with outflows more than doubling from $875 million to $1.9 billion and more than $11 billion in new issuing, but a Volcker Rule exception and a few other positive trends actually caused them to recover.
Income Investing: – Muni-fund outflows spur bond buys. – Tax-loss selling has added to the exodus from municipal-bond mutual funds that’s been a “Groundhog Day” theme around here this year, according to Chris Mauro, RBC Capital Markets’ head of U.S. Municipals Strategy group. “While 2013’s interest rate and credit shocks were the principal drivers behind the outflows early on, we believe that year-end tax-loss selling has meaningfully influenced outflows in recent weeks,” he writes in a recent note Tuesday.
Forbes: – Should you buy municipal bonds this December? – Wall Street is notorious for get-rich-quick myths, wives tales, and misguided theories—typically born out of a combination of greed, desperation, and lack of statistical rigor. However inefficiencies do exist, and can even persist if the conditions are right. As we approach the New Year, it’s worth examining one such ‘anomaly’ that has been lurking in Wall Street folklore for a long time,The January Effect. Simply put, this is the expectation that prices of risk assets will increase in January more than the other months of the year.
MuniNetGuide: – Don’t look now, but the muni industry is changing. – Around this time of the year, it’s always tempting to take a couple steps back and try to see what the market has in store for us going forward. By virtue of not being associated with either a major broker-dealer or a major asset manager, we’ve been fortunate enough to have interacted this year with an astonishing array of tech entrepreneurs and market veterans, many with pioneering visions on how to improve the municipal bond market. The good news: change is coming to the tax-exempt sector.
Christopher Keith: – Municipal bonds: The other 99.95%. – Municipal bond issuers come in all shapes, sizes and credit quality. Through November, seven of those issuers rated by Moody’s defaulted on their bond debt this year. To me, that number is startling because it is so small-especially compared to the projections and some of the headlines we have seen recently that might have led you to believe it would be much higher. The reality doesn’t lend much credence to those pundits who have been advising investors to avoid the municipal market.
The Street: – Kass Katch: Buy closed-end munis. – On a risk/reward basis, closed-end municipal bond funds provide the possibility of an attractive upside return compared to limited downside risk, within the context of either a short- or intermediate-term time frame.
LearnBonds: – Be a year-end tax savvy bond investor. – December is typically the time of the year when the term “tax-loss selling” comes into play. If an investor has sold any asset, including stocks, bonds, real estate, or other tangible property for a gain during the course of any calendar year, from a tax management perspective, it serves as a benefit to offset those gains by selling assets currently priced lower than when purchased.
The Economist: – The bond bears. – If there is a consensus bet for 2014, it is that equities will continue to outperform government bonds, as they did in 2013. But the odd thing is that, if investors relied on the usual fundamental factors, the evidence would seem to point in the opposite direction.
TheStreet: – Investing in corporate bonds for income. – The U.S. stock market has had a great run this year with the Standard & Poor’s 500 Index (SPX)and Dow Jones Industrial Average (DJIA) up about 27% and 24%, respectively. Less noticed has been the white-hot corporate bond market.
BusinessWeek: – Relative yields in U.S. fall to six-year low; Credit swaps hold. – Relative yields on U.S. corporate debt fell to the lowest in six years as investors scoop up riskier assets. A gauge of credit risk held little changed.
Bloomberg: – Bond trade cheapest since ’07 hits record amount. – Investors are paying the least in six years to trade U.S. corporate bonds as they transact more frequently than ever, adapting to a Wall Street where dealers commit less money to facilitate buying and selling.
MarketWatch: – Babson Capital global short duration high yield fund. – Babson Capital Global Short Duration High Yield Fund (the “Fund”) BGH -0.77% announced a special dividend of $0.3105 per share payable on January 2, 2014. The Fund anticipates that this distribution will be paid from short-term and long-term capital gains. This distribution is in addition to the Fund’s regular dividend of $0.1677 per share, which is payable on January 2, 2014.
Forbes: – 2014 High yield bond investment outlook. – Returns and issuance of high-yield corporate bonds in 2014 are expected to fall short of this year’s stellar performance, investors and strategists say. They predict that continued market strength will open the door to more issuer-friendly terms, while the impact and timing of the Federal Reserve’s stimulus-tapering plans will be a wildcard. Worries about Europe’s credit woes and the dysfunctional U.S. government, meanwhile, have receded for the time being.
Reuters: – Emerging market debt trading volumes drop 20 pct in 3rd quarter. – Trading volumes of emerging market debt dropped in the third quarter to $1.266 trillion, a 20 percent decline from the prior quarter as issuers pulled back from selling bonds while uncertainty over U.S. monetary policy increased.
VC Post: – Alternative bond funds a rave in U.S. investors – report. – A report published on The Financial Times said the flow of money poured into a new bond fund class was seen increasing this year despite retail investors’ concern over the possibility of interest rates rising. These bond funds were said to give managers unprecedented authority regarding its trading strategies, the report said.
Matt Tucker: – What did 2013 mean for fixed income markets? – As we approach the end of the year, it’s scorecard time once again – time to see how our predictions and projections for 2013 worked out. In my first blog post of the year, I explained what I thought the macro environment would look like and identified three strategies that I thought investors should consider as a result.
IndexUniverse: – Floating-rate bond ETFs take center stage. – Floating-rate bond ETFs have been very popular this year, partly because of the yields they deliver, but also for the interest-rate risk protection they provide. Come 2014, these ETFs should only become more popular as investors brace for the Federal Reserve to begin pushing interest rates higher.
MarketWatch: – WisdomTree launches rising rates bond Exchange Traded Funds (ETFs) Based on leading fixed income benchmarks. – WisdomTree, an exchange-traded fund (“ETF”) sponsor and asset manager, today announced the launch of its Rising Rates ETF Solution Suite on the NASDAQ Stock Market. The ETFs combine widely followed fixed income strategies with targeted U.S. Treasury exposures to achieve specific durations in order to help manage interest rate risk.
Financial Advisor: – Goldman wins record deposits into bond fund defying higher rates. – Goldman Sachs Group Inc. is drawing record deposits into a bond mutual fund that’s making money even as interest rates rise, giving the bank a boost in one of the few Wall Street businesses it hasn’t dominated.
ETF Trends: – Some bond ETFs can’t wait for 2013 to end. – Bond funds can only hope so as investors have pulled a whopping $72 billion from bond mutual funds this year through the first week of December, CNN Money reports, citing TrimTabs data. Other anecdotes include 2013 being the first year in a decade investors have pulled more out of bond funds than they’ve put in and $72 billion in withdrawals easily tops the record of $63 billion in 1994, according to CNN.
Kiesel: Monetary policy working, at least with housing. 13% homes underwater in 3Q 13 vs. 22.1% 2y ago, per CoreLogic. @federalreserve
— PIMCO (@PIMCO) December 18, 2013
Bond market taking $10bln tapering news in stride so far. Treasury prices marginally higher from pre-FOMC levels. Yields: 10yr 2.87%,…
— AnthonyValeri (@Anthony_Valeri) December 18, 2013