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Have Treasuries Been Irreparably Damaged and Today’s Other Top Stories

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The market heaved a huge sigh of relief today when Republican and Democratic leaders of the U.S. Senate struck a cross-party deal to end a partial government shutdown and raise the U.S. debt ceiling.

The bill, which extends the federal borrowing limit until February 7th and funds the government to January 15th, comes just hours before Thursday’s deadline – when the Treasury indicated it would exhaust its borrowing authority.

Whilst this is good news for the market and averts the possibility of an unprecedented default. There are fears the debacle could have grave long-term consequences for U.S. Treasury bonds.

Economist Eric Green of TD Securities, told the Financial Times.

“The world has seen enough of Washington’s dysfunction and while a retreat from Treasuries can’t happen in one fell swoop, it’s a thought process that has already begun. You can’t blame them, the U.S. hasn’t demonstrated a capacity to manage its reserve role, it’s a privilege we are abusing.”

If sovereign wealth funds decide to retreat from Treasuries, it would probably come at a time when the Federal Reserve starts pulling back from its massive bond-buying program, which has kept Treasury yields artificially low. The result would not be good news for U.S. borrowing costs, according to Gary Jenkins founder of Swordfish Research.

 

Todays Other Top Stories

 

Municipal Bonds

Wall St Pitt: – Storm of Puerto Rican bonds hits U.S. mainland. – Over the past few weeks this blog has addressed the storm to hit individual investors who own municipal securities issued by The Commonwealth of Puerto Rico. First it was major securities houses in August and September ordering tens of thousands of brokers to stop selling these Muni Bonds to clients.

Bloomberg: – Puerto Rico may skirt new debt sales to avoid high costs. – Puerto Rico debt is poised to climb after the commonwealth’s Government Development Bank said the island may skip borrowing before June because of adequate funds.

MarketWatch: – Puerto Rico seeks to calm rattled muni bond investors. – Puerto Rico officials sought to soothe the fears of edgy investors Tuesday as the market continues to price risk into the tropical island’s widely held municipal bonds.

Reuters: – How to navigate the troubled municipal bond market. – If you can avert your eyes from the federal government’s budget and debt-ceiling crisis, you may spot more trouble ahead in the state and local municipal bond markets.

Bloomberg: – Cities fixing budgets prove haven amid U.S. impasse. – Municipal bonds are rallying the most in six months against federal debt, showing how bolstered local-government budgets are making city and state borrowings a haven from political turmoil over a possible U.S. default.

The Tennessean: – Despite risks, cities across U.S. borrow to bolster pension funds. – Despite what finance experts say is a significant risk, cities across the nation continue to borrow money to bolster their employee retirement accounts.

 

Education

Learn Bonds: – How should you build your individual bond portfolio? – From my perspective there are several ways to think about investing in bonds and/or structuring an individual bond portfolio. If you know you will be committing funds periodically to the bond market over a stretch of years, or perhaps even decades, and don’t want to over think each investment, then I think a passive or “agnostic” interest rate and maturity approach is prudent.

 

Treasury Bonds

CNBC: – U.S. Treasurys? No thanks, I’ll take bank debt. – Has bank debt become more attractive than U.S. Treasurys? That’s what recent market developments indicate. The TED spread, which measures the difference between interest rates on interbank loans and U.S. government Treasury bills, turned negative for the first time ever on Wednesday, indicating that investors are more willing to buy bank debt over U.S. Treasurys.

Reuters: – Bank capital constraints didn’t worsen bond selloff -NY Fed. – The dramatic Treasuries selloff in May and June of this year was worsened by banks paring back their activities because of reduced risk appetite for bonds, rather than because the banks faced capital constraints from new regulations, researchers at the New York Federal Reserve said on Wednesday.

 

Corporate Bonds

Donald Van Deventer: – Morgan Stanley bonds: Continued improvement in default risk. – In this note, we turn to the U.S. dollar bonds issued Morgan Stanley and compare its current default probabilities with those we first reported on July 8, 2013. We seek to bring a bond market perspective to the outlook for Morgan Stanley as a complement to analysis based on a common stock holder’s perspective.

Bloomberg: – Machines trading $400 billion of bonds as humans retreat. – A record share of U.S. corporate-bond trading has moved to computers as buyers who traditionally transacted over the phone seek faster ways to buy and sell in a market where Wall Street’s human traders are retreating.

 

High Yield

InvestorPlace: – 5 Signs that investors just can’t get enough risk. – So much for autumn being the worst time of the year for the stock market. Despite the political wrangling in Washington, investors continue to embrace higher-risk assets with open arms.

Income Investing: – Avg junk bond yield back below 6%; A coupon-clipping year? – The junk-bond market seems to be weathering the debt-ceiling showdown reasonably well: it’s up 0.37% in the past week and 1.5% over the past month, per a benchmark Bank of America Merrill Lynch index. Notably, the average junk-bond yield has slipped back below 6% for the first time since late July.

 

Emerging Markets

The Street: – The higher yields of Emerging Market bonds may be worth the extra risk. – Generating income has been a challenge in a low-rate environment, but one solution for U.S. investors is to broaden their horizons. Specifically, the higher yields of emerging market sovereign bonds could justify the risk for investors who are comfortable with holding non investment-grade debt. “Emerging market bonds are also a diversification play,” said David Cowles, director of investments at Mosaic Financial Partners. Mosaic manages the Strategic Asset Allocation portfolio on Covestor.

 

Catastrophe Bonds

aiCIO: – Cat bonds hit record issuance in 2013. – Catastrophe bonds are thriving, recording $6.24 billion in issuance so far in 2013, according to the Artemis Deal Directory.

 

Real Estate Investment Trusts (REIT’s)

Morgan Myrmo: – Is your REIT safe? Introducing the BARS-IQ test with realty income corp. – As REITs are structured in a different manner than other public companies, understanding the independent risks REITs as well as the common metrics used are paramount in considering investor safety. By putting the metrics together, the investor can grade an interesting equity REIT to determine a current margin of safety.

 

Bond Funds

IndexUniverse: – Short-Dated LQD, HYG clones go live Thurs. – iShares on Thursday is launching short-dated versions of its highly successful investment-grade and high-yield corporate bond ETFs “LQD” and “HYG” in a bid to offer investors more protection from capital losses as interest rates rise in the coming months and years.

Yahoo Finance: – Bonds and cash critical to have in portfolio. – Michelle Perry Higgins, California Financial Advisors; Michael Cuggino, Permanent Portfolio Funds; and Jim Lowell, Adviser Investments, discuss market activity while waiting to hear about a deal in Washington.

 

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