Fed to Wind Down Bond Buying in October and Today’s Other Top Stories

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The Federal Reserve announced yesterday that it is on track to end its controversial bond-buying program in October, but that won’t necessarily mean the disappearance of Quantitative Easing altogether.

The Fed’s bond buying has proved a divisive strategy, with many on Wall Street, Congress and academia questioning its effectiveness. But despite its critics, most top Fed officials believe their bond buying helped stabilize markets during the crisis and support economic growth afterward.

Critics of the strategy say that QE was at best ineffective and at worst dangerous. They point to the weak recovery as a sign that asset purchases haven’t done much good. They say the more than $3 trillion in new money created to buy the bonds, much of which is held by banks as excess reserves, is like tinder that could ignite into high inflation once the economy is stronger and banks start lending more freely.

Meanwhile, the extra money coursing through the financial system is fueling bubbly asset prices and excessive risk-taking. With some skeptics saying the Fed’s bond buying boosted stock and bond prices, helping investors, but hasn’t clearly benefited the broader country.

But not everyone was against the strategy, supporters say it was an experiment worth trying after the central bank had cut its benchmark short-term interest rate to near zero in late 2008 during the worst turmoil of the financial crisis, and couldn’t cut it anymore.

Those at the Bank of England say their foray into bond buying after the crisis was effective. The Bank of Japan is still doing it and the European Central Bank is considering it. So despite its critics, QE looks set to become an established tool of the worlds central banks.


Todays Other Top Stories

Learn Bonds

LearnBonds: – European bond yields at record lows. – European Bond yields reached record lows this past week. These lows are not the result of the European Central Bank or of other governmental policies. The rates are low because the economies of Europe are experiencing some pretty rough times.


Municipal Bonds

Bloomberg: – Municipal-debt rules proposed to ensure best price sought. – U.S. securities regulators are moving to require brokers to seek the best prices available when trading state and local bonds for customers, a step aimed at keeping investors from being shortchanged.

FA Magazine: – SEC investor advocate calls for municipal bond market reforms. – Securities and Exchange Commission Investor Advocate Rick Fleming called Wednesday for municipal bond market reforms.

Bloomberg: – Detroit seeks water-bond sellers to escape default: Muni credit. – Detroit’s water and sewer department is set to find out today if it will succeed in striking a deal with bondholders to avert a possible default.

Bloomberg: – Puerto Rico’s general obligations rally to initial price. – Puerto Rico’s general-obligation bonds issued in March rose to 93 cents on the dollar for the first time in a month, giving investors including hedge funds a chance to buy or sell the securities at their initial price.


Bond Market

Great Speculations: – Bond Markets: Fasten your seatbelts, possible turbulence ahead. – Where yields and volatility are today, bond markets do not seem to be anticipating some key inflection points in monetary policy which are lining up on the horizon.  As the Fed moves its focus from ending QE to increasing interest rates, bond markets may be in for a bumpy ride.

Market Oracle: – The bond market is taking advantage of Janet Yellen`s dovishness. – The sheer size of the trade Janet Yellen has encouraged, is going to severely, and negatively destabilize not only the bond market, but inflict major turmoil on many derivative asset classes as this massive stampede out of bonds begins.

Morningstar: – Market Update: Equity, bonds and property. – Developed markets have underperformed emerging markets this year – with the exception of Russia which has been negatively affected by the sanctions.

NY Times: – Talk of higher interest rates doesn’t deter the market. – The stock market rose for a third straight day on Wednesday despite a report from the Federal Reserve that showed a growing number of central bank officials were willing to raise interest rates sooner rather than later.


Treasury Bonds

Bloomberg: – Treasury declines push yield toward 7-year high versus G-7 peers. – Declines in Treasuries pushed yields toward a seven-year high versus their developed-market peers before Federal Reserve Chair Janet Yellen speaks about employment at a conference of central bankers tomorrow.

Market Realist: – Why the Fed’s policy remains the key driver for U.S. Treasuries. –  the prices of U.S. Treasury securities continued climbing upwards in the week ending August 15, confounding bond bears. The Fed must pursue a monetary policy that will help it achieve its congress-mandated goals of price stability and employment at optimal levels.


High Yield Bonds

InvestorPlace: – Junk bond funds – What record outflows are telling investors. – Investors pulled a record $7.1 billion from junk bond funds in the second week of August, according to the Lipper U.S. Fund Flows report. The massive outflows — which are the biggest since Lipper records began in 1992 — also included the largest exodus from stock funds and U.S. stock ETFs since February.


Emerging Markets

WSJ: – Bond sales in Africa losing allure. – Cracks are forming in Africa’s debt boom. African governments are on pace to issue a record amount of bonds in 2014 for a second consecutive year, jumping at the opportunity to borrow at low interest rates to fund infrastructure and other spending.

Bloomberg: – Argentina’s last bond exchange went so well it’s doing another. – Remember when the ISDA’s determinations committee couldn’t find some of Argentina’s bonds, the ones denominated in yen? And then it found them? Well, now some people want it to lose them again. “Some people” presumably meaning “protection sellers”.


Investment Strategy

Zacks: – 5 Strong buy diversified bond mutual funds to excel. – We share with you 5 top rated diversified bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future.

ETF.com: – How to pick the right bond ETFs. – This month we thought we would share one of our tools for our portfolio of fixed-income ETFs. The two main risk factors in the fixed-income world are the duration—related to the maturity—and credit quality of the underlying instruments. These are not the only factors to consider, of course, but they do form a very useful framework for thinking about fixed-income investments.

Money Marketing. – Bonds vs equities: a 30-year picture. – Over the past 30 years, would it have been better to be an equity investor or a bond investor? Considering the massive tailwinds bonds have experienced, it probably would not surprise many people that bond investors in most developed markets have just experienced a 30-year bull market.


Bond Funds

WSJ: – Investors pour into Vanguard, eschewing stock pickers. – Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren’t run by stock pickers or star managers.

Investorplace: – Check out these 3 high-yield REITs. – I’m becoming more and more careful about dividend stocks and REITs. I’m trying to stick to safer bets that still pump out nice yields and aren’t exposed to large systemic risks, or ones that may have strong capital gains potential.

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