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With the Fed about to enter the third month of tapering its monetary stimulus program, a group of prominent economists have warned that the stage may be set for another bond market “tantrum” that could do more economic damage than last summer’s yield spike.
They presented their case to Fed officials at the annual U.S. Monetary Policy Forum, sponsored by the University of Chicago Booth School of Business. The paper warned the Fed that, “in its efforts to signal that interest rates will remain very low well into the future, the Fed could be breeding threats to longer term financial stability by encouraging risk-taking in search of higher yields.”
The Fed should not assume that the economy is secure from financial instability because bank leverage has been reduced; nor should it rely on its “macro-prudential” tools for containing risk, the paper said.
The economists, which include, Michael Ferolli of JP Morgan Chase, Anil Kashyap of the University of Chicago, Kermit Schoenholtz of New York University, and Hyun Song Shin of Princeton University. Went on to say that monetary policy may have to be used to address such problems.
But monetary policy itself – particularly so-called “forward guidance” on the future path of the federal funds rate – can exacerbate financial instability by sending signals to investors that the Fed will stay “highly accommodative,” the economists warn.
You can read the full details of the paper here!
Todays Other Top Stories
Bernardi Securities: – Early 2014 municipal bond market stabilization & rally. – Municipal bond prices have benefitted from a relatively lower supply of new issuance volume, paired with the market stabilizing after the negative initial reaction to Detroit and Puerto Rico’s financial woes. Low issuance is largely driven by the rising yield curve, meaning many refinancing opportunities are not currently feasible. Additionally, as higher tax rates set in, investor demand for non-taxable income is on the rise.
Yahoo: – Scott Siegel, I Really like municipal bonds. – Anticipating the next step for bonds and equities amid rising rates, with the FMHR traders, and Scott Siegel, Morgan Stanley Wealth Management.
Financial Advisor: – Bank, trust officers warned of Dodd-Frank surprises. – Banks and trust officers could get tripped up over several pending regulatory developments as Dodd-Frank Act rule-making winds down, Phoebe Papageorgiou, senior counsel of the American Bankers Association, said today.
BondBuyer: – Camp’s plan spells trouble for munis in future tax reform efforts. – Don’t dismiss Rep. Dave Camp’s draft tax plan as a non-starter. It’s going to be a foundation for tax reform and most of the bond proposals it contains have already been made and will continue to be made by lawmakers, administration officials, deficit reduction groups, and tax experts.
Reuters: – U.S. muni bond sales to climb to $5.16 bln next week. – The supply-starved U.S. municipal bond market will get some relief next week when debt sales are expected to jump to $5.16 billion from this week’s $2.42 billion, with top-rated deals from Texas and Maryland on tap, according to Thomson Reuters estimates on Friday.
LearnBonds: – Three solid income stocks for 2014. – What can a low-to-moderate-risk investor do for better income? Buy junk? You don’t have to go there. I’ve got three better ideas, three tasty dividend-paying stocks that can boost your income without taking on too much risk.
Forbes: – Cisco’s debt sale bolsters U.S. cash while adding value through share buybacks. – Cisco sold about $8 billion worth of bonds on Monday, taking advantage of low interest rates to raise cheap debt and finance share buybacks. The company issued debt in seven tranches of fixed- and variable-rate securities, with maturities varying from 18 months to 10 years, in what was its first such offering in three years.
Businessweek: – J.C. Penney bonds reach highest in seven weeks in profit revival. – Bonds of J.C. Penney Co. (JCP:US) climbed to the highest level in seven weeks as the retailer made its first profit in more than two years.
MoneyBeat: – Low tide for high-yield defaults. – Ultra-low interest rates and a rush of money into bond markets seeking returns: times should be good for high-yield borrowers. Indeed, they are. Maybe, though, they’re a bit too good.
Advisor Perspectives: – Bond Aid: Positive outlook for high yield in 2014. – While most fixed income asset classes tied to interest rates saw negative returns during 2013, high yield bonds returned more than 8%, according to the JPMorgan Domestic High Yield Index. While we anticipate slightly lower returns in 2014, it looks to be a positive year for high yield markets.
ETF Trends: – ETF Spotlight: High yield corporate bonds. – The iShares Global ex USD High Yield Corporate Bond fund tries to reflect the performance of the the Markit iBoxx Global Developed Markets ex-US High Yield Index, which is comprised of high yield, speculative grade corporate bonds denominated in euros, British pound sterling and Canadian dollars.
Forbes: – High yield bond fund cash inflow dwindles To $559M. – Retail-cash inflows to high-yield funds totaled $559 million in the week ended Feb. 26, according to Lipper. This is the third consecutive inflow, but the lowest over that span following an $804 million inflow last week and $1.45 billion in the week prior.
DealBook: – Paper warns of exodus from emerging market bond funds. – Low interest rates have incited a craze for risky bonds in fast-growing economies, and few fund companies have been more adept in meeting this demand than Pimco, the world’s largest bond manager.
Kiplinger: – Buy emerging-markets bonds. – If you’re willing to take some risk with part of your income portfolio, you can find a number of well-run, no-load emerging-markets bond funds.
Emerging Markets Daily: – Thanks China, capital flow out of EM accelerated this week. – In the week leading to February 26, capital outflow from emerging markets dedicated funds accelerated again. Over $3 billion left EM equity funds, led by GEM funds ($1.3 billion) and Asia-dedicated funds ($1.2 billion), data from EPFR Global show. On the bond side, $1.8 billion left, about equally split between hard currency and local currency funds.
MNI News: – PIMCO sees opportunities in some emerging markets. – On the emerging market debt front, “we see opportunities in local rates in countries like Brazil and Mexico where the market has started to price more rapid interest rate increases than we think will materialize and where the market forecasts the longer term equilibrium rate to be higher than we overshoots” have created think it should be,” he told MNI.
Market Realist: – Why worry when you can hedge your fixed income portfolio? – The chart below shows how different exchange-traded funds (or ETFs) react differently to market interest rate changes depending on their sensitivity—that is, the degree of interest rate risk associated with securities in their portfolio.
Fox Business: – 4 Investments with higher yields and risk. – While none of the high-yield options out there are risk-free, and many are considered high risk, some alternatives exist that can help retirees reach their income goals. Following are four popular investments with higher yields.
Morningstar: – A moderate tax-efficient portfolio for retirees. – This investment portfolio balances capital preservation with growth potential.
Canadian Underwriter: – 2013 closes with record catastrophe bond issuance. – Significantly reduced pricing, relative to recent years, contributed to about US$7.1 billion worth of new property and casualty catastrophe bonds being issued in 2013, notes a briefing issued Thursday by GC Securities, a division of MMC Securities Corp.
WSJ: – Janus launches multi-sector income fund. – Janus Capital Group Inc. (NYSE:JNS) today announced the launch of the Janus Multi-Sector Income Fund that seeks to identify compelling income-generating opportunities across fixed income sectors. The fund, which launched on Feb. 28, 2014, will be managed by Janus Capital Management LLC.
Zacks: – Zacks #1 Ranked government bond mutual funds. – We share with you 5 top rated government 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. To view the Zacks Rank and past performance of all government bond funds.
Kiesel Deputy CIO: Macau remains one of the best long-term plays on the EM consumer. If you aren’t invested in #Macau gaming, you should be.
— PIMCO (@PIMCO) February 28, 2014
Pending home sales not as bad as they thought
— David Schawel (@DavidSchawel) February 28, 2014
— Cate Long (@cate_long) February 28, 2014
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