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Treasury Yields Fall as Fed Holds Off on Taper and Today’s Other Top Stories

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Ben-BernankeThe Federal Reserve has announced it will continue to buy bonds at the current level and will not scale back “taper” the amount of Treasuries it purchases as part of its monetary stimulus program.

The move, announced after September’s meeting of the Federal Open Market Committee (FOMC), surprised the market which had predicted a $10 billion dollar taper to Treasury bonds, with some even suggesting a $5 billion taper to mortgage-backed securities (MBS) as well.

The Fed said that whilst the economy was showing signs of improvement they want to see more evidence that progress can be sustained before adjusting the pace of its purchases. As a result the Fed will continue to purchase mortgage-backed securities at a pace of $40bn a month and Treasury at a pace of $45bn a month. It made no change to its 6.5% unemployment rate threshold for a rise in interest rates.

The Fed also cut growth forecasts, they now see the economy growing in a range of 2.0% to 2.3%. Earlier forecasts had predicted growth of 2.3% to 2.6%.

After the announcement U.S. Treasuries rallied, sending yields down sharply. The yield on the 10-year Treasury note dropped nearly 10 basis points, or 0.10 percentage points, to 2.755%, while the five-year note yield plunged nearly 12 basis points to 1.49%. Treasury yields move in the opposite direction of prices.

Todays Other Top Stories

FT: – Why the Fed did not make an exit. – The Federal Reserve refrained on Wednesday from reducing its experimental bond purchase program, thus maintaining its unconventional support for markets and the economy. In doing so it is probably signalling more than continuing worries about America’s tepid recovery, high unemployment rate and the risk of another round of self-manufacturing problems courtesy of Congress. It may also be signalling its concern about triggering renewed financial volatility that would undermine growth, job creation and global financial stability – worries that are unlikely to dissipate easily given the different reaction functions of the economy and markets.

FT Adviser: – High yield becoming more globalised. – High yield bonds are becoming more common worldwide, opening up new opportunities to fixed income investors, according to Hermes.

Reuters: – Foreigners buy U.S. bonds in July after June selloff. – Foreign investors rediscovered a taste for long-term U.S. securities in July as Japan and China increased holdings of U.S. government bonds, which had suffered a record outflow in June.

ETF Trends: – Time to get back to fundamentals in muni bonds. – The summer was a fairly tortuous one for muni bonds, with the S&P Municipal Bond Index having lost 5.57% between June and August. In fact, most fixed income sectors struggled as interest rates spiked after the Federal Reserve’s first hints of easing off quantitative easing. Notably, the volatility in the muni market over the past few months has had a lot to do with rates — and very little to do with credit events (even big ones like Detroit). Despite the volatility and headline noise, in my opinion, the reality is that the fundamentals underlying the municipal market are stronger than they have been in five years. A big statement? You bet. And here are just a few reasons to believe it.

MoneyBeat: – China bought record amount of bonds, mortgage securities in July. – China, the biggest foreign bond buyer of U.S. debt, bought record amount of bonds issued by U.S. government agencies including Fannie Mae and Freddie Mac and securities backed by residential mortgage loans in July while selling Treasury notes and bonds for the first time since April, according to the latest capital flows data from the Treasury Department.

Adam Aloisi: – 20% Total return potential from this high-yield bond fund. – Bonds – the asset everyone seemingly loves to hate. Yet through the recent rate volatility and somewhat benign economic environment, there appears opportunity in a somewhat esoteric corner of the fixed income market. Many closed-end high-yield bond funds currently trade at undeserved discounts to their net asset values, presenting a total return opportunity in the neighborhood of 20% over the next year. Western Asset High Yield Defined Opportunity Fund is a fund that has the potential to achieve such results.

Quartz: – The bond market is on track for its worst year in four decades. – The broadest gauge of the US bond market—the Barclays Aggregate index—posted a string of gains in the post-crisis era, as investors ditched stocks for the safety of bonds. The Federal Reserve’s effort to repress interest rates accelerated the shift, since when interest rates fall, bond prices rise. The result? The Barclays Aggregate rose 6% in 2009, 6.5% in 2010, 7.8% in 2011 and 4% in 2012.

Reuters: – U.S. investors turn to more dealers as bond liquidity declines. – U.S. fixed-income investors are turning to a greater number of dealers to find liquidity as higher bank capital rules lead dealers to reduce their market-making activities, according to a study by Greenwich Associates released on Wednesday.

Euromoney: – Corporate bonds: Timing was everything for Verizon bond take-out. – You wait ages for the largest corporate bond deal of all time to come along and then two arrive within six months of each other. But the bond launched by US telecoms giant Verizon on September 11 looks like hanging on to the title for a while. The deal is the bond take-out of a $61 billion 364-day bridge loan that backs Verizon’s $130 billion acquisition of Vodafone’s 45% stake in its US wireless business.

Forbes: – Microsoft bonds tick wider in trading after aggressive fiscal moves. – Secondary market prices moves in Microsoft debt issues suggest a cautious reception from bondholders to the company’s flurry of aggressive fiscal-policy announcements in recent days, including a deal to buy Nokia’s handsets business and plans to return massive amounts of cash to shareholders, trade data show.

The Market Oracle: – U.S. Treasury bonds corrective rally could forecast. – I hate to say this again, but major pairs on the FX market place still have a very unclear price action and no direction at all on the intra-day basis. It’s probably “calm before the storm” ahead of highly anticipated FOMC press conference of the last few years, when Bernanke could announce tapering.  Statement will be out at 18:00GMT and press conference will be scheduled 30 minutes later. So until then we may not see a lot of price action today.

Bloomberg: – Fidelity joins Pimco in cutting provincial bonds. – Provincial bonds are emerging as Canada’s biggest casualties of speculation the Federal Reserve will begin slowing four years of monetary stimulus.

Fundweb: – The growing appeal of global corporate bonds. – As investors strive for diversification and to protect portfolios against rising rates in the major economies, the appeal of global investment grade corporate bonds is increasing.

Fortune: – Investors may regret taking a bite of Verizon’s big bond deal. – When you’ve gone hungry for a long time, even mediocre takeout dishes can look like something scrumptious from a five-star restaurant. That explains the stampede by buyers to gobble up Verizon’s record $49 billion debt offering.

Fox Business: – Think twice before assailing junk bond ETF liquidity. – It’s one of the ETF industry’s largest confabs of the year. Morningstar’s annual ETF Invest Conference brings together industry experts from across the country to discuss investing strategies and developments. About 400 people attended last year.

Tim Rohkemper: – A fixed-income dilemma. – In this article we will analyze how a conservative, passive investor’s portfolio has shifted from a high-quality bond allocation toward a basket of low credit quality bonds over the past 10 years.

FT: – Verizon’s $49bn bond sale whets appetite for larger issues. – Mega, supersized, jumbo and slam dunk are just a few of the superlatives used to describe last week’s $49bn sale of Verizon bonds to eager investors.

Bloomberg: – Puerto Rico yield above Greece fuels longest rally. – Puerto Rico bonds are staging their longest rally in two months after prices plummeted about 40 percent this year and yields soared above those on Greek debt.

Bloomberg: – Avoiding next Detroit means watching muni ratings, Fischer says. – Phil Fischer, head of municipal research at Bank of America Merrill Lynch in New York, has a simple suggestion for investors who want to avoid the next Detroit: Look at the ratings.

Reuters: – U.S. SEC unveils scaled-back municipal adviser rule. – Employees and appointed officials of municipal governments would not have to register as financial advisers under a final rule federal regulators were set to finalize on Wednesday, which should allay bond market concerns that new laws on advisers would ensnare too many people in cumbersome regulation.

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