Fed Weighs Changes to Rate Guidance and Other Top Stories

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Bloomberg reports today that Federal Reserve officials are considering altering their guidance on the likely path of interest rates in order to allow them more flexibility to react to changes in the economy.

The Fed has previously said that its benchmark rate would stay low for a “considerable time” after it completes its monthly bond buying program later this year.

The need for new rate guidance unites policy makers who want to keep rates low for longer, like Boston Fed President Eric Rosengren, with those who prefer to raise them sooner, such as Philadelphia’s Charles Plosser.

Both want to move away from promising to keep rates low for some unspecified period of time toward tying the first increase to changes in inflation and the job market. One stumbling block: how to change the language without sparking an unwanted jump in bond yields that could threaten to stifle the expansion.


Todays Other Top Stories

Learn Bonds

LearnBonds: – Making sense of the small business optimism index. – There is so much ‘noise’ and uncertainty in the economic system that small business owners are finding it difficult to be optimistic in this environment. Overall, small business is still not in a good place.


Municipal Bonds

Bloomberg: – N.J. rating cut by S&P as Christie gets record downgrade. – New Jersey had its credit rating cut one step by Standard & Poor’s, giving Chris Christie his eighth downgrade, the most ever for a Garden State governor.

The Trade Wire: – New York municipal bonds – What are you investing in? – In this day of low interest rates, the cry for yield may seem desirable when investing in bonds and funds. Given this environment, it’s no surprise that when I was traveling in New York for several weeks this summer, I was asked to review New York Municipal bond funds. Before I share my findings, I would like to cover some terms about municipal bond funds that are important to understand.

Bond Case Briefs: – New borrowing drags down U.S. municipal bond sales in August. –  Issuance of U.S. municipal bonds edged down last month as new borrowing saw the slowest August in 17 years, Thomson Reuters data released on Tuesday shows.

Insurance News: – Advisor groups push for clarity in municipal market rules. – Banks, insurance companies and financial advisors want more clarity on principal transactions and disclosures in proposed rules drafted by regulators governing the conduct of nonsolicitor municipal advisors.

AJC.com: – SEC complaint filed in Braves bond issuance. – A Cobb County attorney said Tuesday that she filed a complaint with the U.S. Securities and Exchange Commission in relation to the county’s plan to issue up to $397 million in bonds for construction of the new Atlanta Braves stadium.

Bond Buyer: – Schumer urges regulators to include munis in liquidity rule. – Sen. Chuck Schumer, calling municipal securities the “lifeblood” of U.S. infrastructure development, pressed regulators to revise federal banking liquidity rules to classify certain munis as high-quality liquid assets.

WSJ: – Don’t underestimate muni bond default risk. – If there is one thing about which individual investors have a fundamental misunderstanding regarding municipal bonds, it is default risk. A municipal bond is not a Treasury, which is free of default risk because the federal government could always create more money to satisfy the obligation.

Bloomberg: – California’s shrinking note sales show brown fiscal gains. – California is set to borrow the least since 2006 for cash-flow needs as tax revenue exceeds projections, keeping the most-indebted state on track for higher credit ratings.

Bloomberg: – Chicago said to set initial prices on $371 million of water debt. – Chicago set preliminary prices on $371 million of tax-exempt water bonds in its first such offering since 2012.

Bloomberg: – Puerto Rico power debt highest since June with AlixPartners hire. – Prices on junk-rated Puerto Rico electric bonds reached a three-month high after the utility picked turnaround firm AlixPartners LLP to bolster its operations.


Bond Market

Morningstar: – Caution in the bond market. – Across the wide range of bond markets, yields are close to all-time lows. Indeed, in continental Europe bond yields are the lowest in some 500 years.

CIO: – Fresh liquidity warning from bond managers. – Two bond fund managers have issued stark warnings about liquidity in fixed income markets as investor attention turns towards expected interest rate increases in the coming months.

CNBC: – Fed rate hike fears hit U.S. bond markets. – Demand for U.S. Treasurys waned for a fifth consecutive session, ahead of an official auction of 10-year notes on Wednesday and a key Federal Reserve meeting next week.

About.com: – Will the bond market crash? don’t bet on it. – When it comes to the bond market, one of the most talked-about issues right now is whether the U.S. Federal Reserve’s need to raise short-term interest rates will bring about a bear market. This topic is frequently discussed in dramatic terms, which fosters the belief that the bond market is on track for a crash.


Treasury Bonds

MarketWatch: – 10-year Treasury yield eyes highest close in six weeks. – Treasury prices slid Tuesday, putting the benchmark yield on track to rise to a six-week high.

Businessweek: – Treasuries world’s worst performers on Fed rates outlook. – Treasuries are the world’s worst-performing bonds this quarter amid concern investors are underestimating risk the Federal Reserve will raise borrowing costs next year.

WSJ: – U.S. Government bonds fall again. (Subscription required) U.S. Treasury prices extended losses Wednesday, lifting the 10-year yield above 2.5% as investors brace for a turning point in Federal Reserve policy.


Investment Grade

Bloomberg: – Baloise buys U.S. leveraged loans in corporate debt push. – Baloise Holding AG (BALN) is buying U.S. leveraged loans to increase its holdings of corporate debt, as insurers embrace riskier investments amid record-low interest rates.

Donald van Deventer: – Bank of America and its high marginal cost of funds. – We compare the marginal cost of funding for Bank of America Corporation using the U.S. Dollar Cost of Funds Index and traded bonds on September 8, 2014.

Alacra Store: – U.S. Corporate bonds have rebounded after experiencing their first month of losses in 2014. – After experiencing their first month of losses in 2014, U.S. corporate bonds saw sizable returns in August. The gains were larger for investment-grade issues, though speculative-grade bonds also saw healthy returns for the month.


High Yield Bonds

ETF Guide: – Are junk bonds signaling pause in equity rally? – What does the bond market know that the stock market doesn’t? Even the U.S. stocks have been scoring one record high after another, the SPDR Barclays High Yield Bond ETF has gone in the opposite direction.

Income Investing: – Gundlach ‘Not really afraid of junk bonds’ now, adds more. – DoubleLine’s Jeffrey Gundlach’s webcast continues, and he says he’s added to his high-yield holdings in the past month or so since that market’s acute selloff at the end of July.

Market Realist: – Overview: Current junk-rated debt and leveraged loans situation. – Bond investors have options when it comes to structuring their fixed income portfolios. They may invest in debt that’s rated investment-grade or non-investment grade (or junk-rated).


Emerging Markets

Bloomberg: – Hugo Chavez’s absence felt on Wall Street bond desks. – Venezuelan bond investors are learning the hard way that Nicolas Maduro is no Hugo Chavez.

FE Trustnet: – Which emerging markets funds are most exposed to another Fed shock? – Fitch has identified a number of emerging markets that would be hurt by aggressive rate rises by the Federal Reserve. FE Trustnet looks which emerging market debt funds have the most exposure to these countries.

Bloomberg: – ECB replaces Fed as driver of emerging markets. – The European Central Bank is overtaking the Federal Reserve as the biggest driver of emerging-market assets, giving bonds from Brazil to Poland a boost from lower borrowing costs in the euro area, according to Goldman Sachs Group Inc.

Morningstar: – What is your emerging-markets allocation? – Investors’ average 3% to 4% allocation is low given the rising importance of emerging markets.


Investment Strategy

Morningstar: – 3 Foreign bond funds for conservative investors. – Picks for globalizing a portfolio without adding a lot of volatility.

Amit Ghate: – Why I’m building a short position in bonds. – The Fed’s goal of reinflating equity and real estate markets has largely been met. I’ve initiated a short position in bonds and will add to it through longer term dollar cost averaging.

ETF Channel: – 10 Top performing ETFs. – These are the top 10 best performing ETFs over the past twelve months.


Bond Funds

ETF.com: – Daily ETF watch: ‘LadderRite’ fund lists. – Invesco PowerShares is rolling out a laddered-strategy bond fund that is a sort of follow-up to an ETF the firm launched several years ago.

FE Trustnet: – Why your bond fund is probably too big. – Hermes’ Fraser Lundie says the regulator is underestimating the threat that ballooning fund sizes and constrained mandates pose to the post-crisis credit market.


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