Fed’s Message Finally Sinks In and Today’s Other Top Stories

fed tightening

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The Fed has been driving home its message for months, “tapering does not mean tightening”. Meaning that when the Fed starts to scale back the level of bonds it purchases as part of its monetary stimulus program, it does not mean the automatic rising of interest rates.

On Monday we wrote about the the market factoring in a nine month gap between the end of QE and the first interest rate rise. Now it appears the message is finally sinking in. Demand for shorter-dated U.S/ government debt sales perked up this week, with overall demand for two-year notes climbing to $32 billion on Monday, the highest since April.

The WSJ reports that, $35 billion five-year Treasury notes Tuesday afternoon were offered at a yield of 1.34%, slightly lower than the level before the sale. Lower yield signals demand is stronger than dealers had anticipated. One highlight is strong buying from foreign investors via the 50% indirect bid, the highest since July.

This must be music to the ears of Bill Gross who has long advocated buying short term debt. The two-year Treasury note’s yield was recently at 0.297%, having fallen from a peak above 0.55% in early September.

So what does this mean for bonds? Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, argues that even assuming the Fed stops buying bonds completely in 2014, the fair value for 10-year yields based on economic growth and inflation expectations is around 2.70%–2.80%.

“On that basis, recent trading suggests that there’s a likelihood of tapering already priced into current long term interest rates,” he said.


Todays Other Top Stories

Municipal Bonds

MuniNetGuide: – What to be thankful for in munis. – With virtually no new issue supply to speak of this holiday week and relative stability on the rate front, this might be a good time to take stock of everything that’s happened in the muni market this year. And there certainly hasn’t been much to be thankful for.

Governing: – An update on two endangered tax breaks. – With just over a month left in 2013 and Congress’ already abysmal track record, it’s a good bet that nothing will happen with tax reform this year. For states and localities, that’s a huge relief. After all, two items on tax reformers’ hit lists include the tax-free interest on municipal bonds and the ability of taxpayers to deduct state and local taxes from their federal income taxes.

Bloomberg: – Fewest defaults since 2009 masked by Detroit record. – Municipal issuers are defaulting at the slowest pace in at least four years even as Detroit’s record bankruptcy and losses on Puerto Rico debt fuel the market’s biggest declines since 2008.

Metro and State: – Banks object to Detroit’s proposed $350M bankruptcy loan. – Several banks objected to a proposed $350 million loan Wednesday that the city is pursuing to finance restructuring while Detroit is in bankruptcy.

Reuters: – U.S. municipal bond sales fall in November as refundings shrink. – Sales of U.S. municipal bonds shrank to $23.16 billion this month, as debt refundings dropped sharply from a year ago, according to preliminary Thomson Reuters data released on Wednesday.

Financial Advisor: – Is now the time for advisors to invest in muni bond funds? – Municipal issuers are defaulting at the slowest pace in at least four years even as Detroit’s record bankruptcy and losses on Puerto Rico debt fuel the market’s biggest declines since 2008.

Bloomberg: – Fewest defaults since 2009 masked by Detroit record. – Municipal issuers are defaulting at the slowest pace in at least four years even as Detroit’s record bankruptcy and losses on Puerto Rico debt fuel the market’s biggest declines since 2008.


Treasury Bonds

IndexUniverse: – A new TIPS approach. – Much has been made recently about the potential end of the 30-year bull market in interest rates and the reactions of many investors to shorten the duration of their fixed-income holdings. But because of extremely low rates on the shortest part of the curve, advisors must be cautious not to shorten too extensively as they might miss potential yield opportunities. One potential trade idea to accomplish this is to move exposure off the longest part of the curve and focus on the intermediate part of the curve.


Corporate Bonds

Learn Bonds: – Weighing your investment grade bond options. – There are a host of reasons for considering investment grade bonds: diversification, capital preservation, an elevated stream of income compared to cash – the list goes on and on. Though bond detractors tend to point to the historically low interest rate environment in which we live as reason to avoid bonds, investors concerned with the stock market’s valuation or those that cannot handle rampant volatility may find considerable solace in owning a portfolio of individual bonds.

Bloomberg: – Corporate bond spread near 2007 low as gross says fed on hold. – The extra yield corporate bonds offer over Treasuries was one basis point away from the narrowest level in six years as the Federal Reserve’s pledge to keep interest rates low drives a search for income.

WSJ: – Small print looms larger for bond buyers. – Corporate bond prospectuses, being weighty tomes filled with dense jargon, aren’t as much fun to read as paperback thrillers. But with yields low and demand high, investors need to be reading the fine print all the more closely, particularly when it comes to covenants.


High Yield

Income Investing: – Junk bonds face opposing forces of strength, constraint. – Junk bonds might look like they’re in a period of relative calm, but there’s a dynamic tension behind that stability. Wes Sparks and Martha Metcalf, respectively head of U.S. fixed income and senior high-yield portfolio manager at Schroders, say junk-bond valuations look like they’re starting to peak, but the market is in the first month of what’s historically its best three-month period of the year.

The Street: – High yield hits and misses. – One of the themes for 2013 has been the rotation in high-yield asset classes that has seen money change direction based on the prevailing sentiment in interest rates.

About.com: – Yield spreads on corporate and high yield bonds indicate limited upside potential. – One of the most important gauges of value that investors use in assessing investment-grade corporate and high yield bonds is their “yield spread” relative to U.S. Treasuries. The yield spread represents the yield spread of a given asset class over Treasuries, which are seen as being free of credit risk. As a result, it shows how much investors need to be paid in order to take on the added credit risk in these two market segments.


Emerging Markets

Zacks: – ProShares launches emerging market bond ETF. – ProShares is best known as an ETF provider of leveraged and inverse funds and it is one of the main players in this market. However, the company has also made a big push into the unleveraged ‘regular’ ETF market as of late, launching a series of funds in this corner of the fund world over the last few weeks.

YourMoney: – Back to basics: a quick guide to emerging market debt. – What is emerging market debt? Emerging market debt is a term used to encompass bonds issued by governments and corporates in developing countries.


Bond Funds

Market Realist – Why bonds sold off on stronger economic data and a hawkish Fed. – Long-term interest rates are priced off the benchmark long-term bond, which is the ten-year Treasury. These days, the ten-year bond reacts to economic data through the Federal Reserve’s asset purchase program, also known as quantitative easing (or QE). As a general rule, economic data that shows weakness is bond bullish (positive). However, data that shows strength isn’t necessarily bond bearish (negative).

Morningstar: – PIMCO’s 2013 Struggles. – Mohamed El-Erian has them muttering. Steve Goldberg of Kiplinger writes, “El-Erian’s PIMCO Fund falls flat … PIMCO Global Multi-Asset has been little short of a disaster.” An email correspondent, after seeing yet another headline about PIMCO’s forecasts, quips that El-Erian is “overexposed in the media and underperforming on the fund statement.” So whats going on?

WSJ: – Long-term mutual fund inflows $3.63 billion in latest week. – Long-term mutual funds had estimated inflows of $3.63 billion as equity funds and hybrid funds benefited from inflows, while outflows from bond funds were lower, according to the Investment Company Institute.

Bloomberg: – Long bonds spurned as buyers seek taper shelter. – Bond buyers are demanding the most in at least a decade to own long-dated bonds relative to debt with short maturities as they seek to protect themselves from losses when the Federal Reserve starts scaling back stimulus.

InvestmentNews: – Clients may balk, but it’s time to rebalance portfolios. – The holiday shopping season kicks off on Friday, but clients may think their financial advisers are buying them a load of coal when they see their quarterly statements. That’s because advisers are poised to buy some (gulp) bonds (interest-rate risk included) before the end of the year even though the outlook for stocks is far brighter.

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