Fed Shifts Tactics and Today’s Other Top Stories

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Will the end of Ben Bernanke’s tenure as head of the Federal Reserve also spell the end for his much vaunted bond buying program. Up until now, most analysts agreed that Janet Yellen would merely continue Bernanke’s program, when she takes the reins in January.

But now there are murmurings of a change in tactic. Research papers by key Fed staffers point strongly to the central bank shifting away from its bond-buying program. Instead, opting for short-term guidance, keeping interest rates near zero until the jobless rate declines even further than previously envisioned.

Jan Hatzius, chief U.S. economist at Goldman Sachs, cites a pair of new papers by the most-senior Fed staffers for monetary policy and domestic macroeconomics. Saying they point strongly to a lowering of the declared unemployment-rate threshold for raising the overnight federal funds rate target, to 6% from 6.5%, as currently indicated by the Fed. Indeed, the research suggests a 5.5% jobless-rate threshold would work best to spur the economy.

So why the change? There is growing concern that Quantitative Easing has served its purpose and is now merely pumping up asset prices, while failing to deal with continued high unemployment and diminishing incomes.

The upshot is that the U.S. economy remains operating well below potential despite QE, and that more bond buying will do little to alleviate the problem.

So if this is the Fed’s next move, when will it happen? Hatzius doubts they will do anything in December, he is aiming for March instead. But if and when it does happen, it’s likely to have a much less dramatic effect on the bond market, than the tapering fears of this summer. When investors abandoned the bond market on the threat of rising rates. Bill Gross will be pleased.


Todays Other Top Stories


Municipal Bonds

Forbes: – How did UBS recommend Puerto Rico junk for mom and pop clients? – How on earth could trusted, so-called UBS “financial advisors” recommend that conservative and retired investors in Puerto Rico fill their accounts with Muni Bonds which have near junk ratings?

WSJ: – SEC fines a muni bond issuer for first time; underwriter penalized. – The Securities and Exchange Commission handed out its first-ever financial penalty against a municipal-bond issuer, fining an agency that developed an ice-hockey arena in Washington state for misleading investors.

Reuters: – Investors get extra yield for New Jersey bridge muni bonds. – Municipal investors demanded extra yield to buy some of the $462 million of low-rated tax-free private activity bonds sold on Tuesday to finance a bridge project between New Jersey and New York.

Daily Wealth: – How to earn extra returns on the world’s safest income investment, – I’ve developed a way to make one of my top income investments safer and even more lucrative. By crunching just a few numbers, I can pinpoint the best times to buy for capital gains… and higher yields.

Left Banker: – Tax-free 8% yields? Check out bargain-price muni bond CEFs. – Following a bit of a recovery from the price drop earlier this year in response to anxieties about rising interest rates, municipal bond closed end funds have suffered yet another drop. Many have given back the paltry gains they had shown.

BusinessWeek: – Localities seek approval for $18 billion of bonds: Muni credit. – U.S. localities are asking voters to approve about $18 billion of bonds for schools, hospitals and streets, less than half the 2007 record for an off-year election, showing officials’ reluctance to take on borrowing.


Treasury Bonds

ETF Trends: – Treasury ETF bull roars back. – U.S. Treasuries tumbled earlier this year after the market predicted an imminent change to Federal Reserve policy. However, investors are taking a second look at bond exchange traded funds as economic strength falters and Fed tapering is pushed to the back burner.

BusinessWeek: – Treasury 10-year yield falls from 3-week high as growth slows. – Treasury 10-year note yields fell from almost the highest level in three weeks as Federal Reserve officials highlighted a lack of strength in the U.S. economy before data this week forecast to show expansion slowed.

FT: – Time to buy bonds? – U.S. Treasury bonds have been in a bull run for 30 years, but many think tapering will be the beginning of the end. Nick Gartside, international CIO for fixed income at JPMorgan Asset Management, explains to James Mackintosh why bonds remain a buy.


Investment Grade

BusinessWeek: – Liquidity drought allayed in Fed-fueled trading: Credit markets. – Corporate bond trading volumes are surging the most since 2008 as buyers wager they’ll be able to reap more gains before the Federal Reserve starts tapering stimulus that’s fueled a record rally in the debt.

ETF Trends: – New investment grade bond ETF hedges against rising rates. – In anticipation of a rising rate environment, ProShares is expanding its interest rate hedged bond exchange traded fund suite to include an investment grade debt play.


High Yield

Fundweb: – Psigma’s Becket: Is high-yield an accident waiting to happen? – Psigma Investment Management has become “incredibly selective” when it comes to high yield bonds, arguing that heavy flows into the space may have created “an accident waiting to happen”.


Catastrophe Bonds

WSJ: – Q3 2013 Sees highest catastrophe bond issuance in 15 years, says Willis Capital Markets & Advisory. – The third quarter of 2013 saw $1.4 billion of non-life catastrophe bond capacity issued through seven bonds, in comparison with $0.5 billion issued through three bonds in the third quarter of 2012, according to Willis Capital Markets & Advisory.

FT Adviser: – Product review: Schroder GAIA Cat Bond fund. – Schroders plans to capitalise on the popularity of cat bonds with a new fund, but how will it invest?


Emerging Markets

Emerging Markets Daily: – Here comes an index for EM local currency corporate bonds. – Indexing is important, because asset managers use indices to benchmark against their portfolios. Financial companies are more likely to launch new funds in a new asset class when there is an underlying index.

BusinessDay: – EM Central banks and prospects of Fed tapering of QE. – The zero interest rate policy (ZIRP) and quantitative easing embarked upon by Central Banks in most developed economies has led to a flood of money moving into emerging and frontier capital markets.

FT: – EM bond rebound brings record within reach. – Debt sales from the developing world have rebounded after a summer of turmoil and the US budget crisis stunted demand, leading analysts and bankers to predict the second record year of bond issuance in a row.

ETF Trends: – Emerging market investors shunning bond ETFs. – Distracted by the rally in the equities market, investors continued pulling assets out of emerging market bond exchange traded funds.


Bond Funds

Felix Salmon: – When bonds don’t trade. – Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even government debt.

Investment News: – ‘Perfect storm’ for tax swaps means potentially fruitful strategy for advisers. – How to use the drop in bond prices and the rise in other assets to your tax advantage.

Motley Fool: – The biggest bull turns bearish on high-yield mREITs. – American Capital Ltd. reported earnings on Tuesday, and they weren’t pretty. As expected, the company announced a big writedown on its asset manager, which collects fees from American Capital Agency and American Capital Mortgage. This is the second quarter in a row that American Capital has written down its asset management division. In June, the American Capital said its asset manager was worth $981 million, down $75 million from the prior quarter.

ETF Database: – 5 ETF alternatives to troubled Treasuries. – Today’s fixed income environment seems to be turned on its head. It used to be that U.S. Treasuries were thought of as one of the safest possible allocations one could make; whether or not this is still the case, the public perception has certainly shifted. After watching Congress bump up against defaults on more than one occasion, it seems that the confidence that once boosted U.S. debts is beginning to erode.

Income Investing: – Bonds cheer possible Fed rate target change. – Shorter-term government bonds are better this morning amid hopes that the Fed might consider lowering its target unemployment rate that it has said will determine when it will start raising short-term interest rates.



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Simon G

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