Interest Rates Will Follow Path of Least Resistance and Today’s Other Top Stories

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Investors have been confounded by the reluctance of Treasury yields to climb higher. With interest rates at record lows and the U.S. Federal Reserve about to withdraw stimulus, yields had nowhere to go but up, analysts said.

Of course thats not how it played out, by early August, 10-year Treasury yields were trading as low as 2.35 per cent, down from 3.02 per cent in January.

A number of factors have helped push Treasury yields lower. With yields on German 10-year bonds at historic lows of about 1 per cent and Japanese government bonds yielding around 50 basis points, Treasuries look comparatively attractive.

Add to that the perception that both the yen and euro are a one-way bet towards depreciation and it is reasonable to expect that international capital will continue flowing towards the U.S., pressuring Treasury yields down as quantitative easing draws to an end.

And there are signs Treasury yields could fall further. Scott Minerd of the Financial Times says tensions from Ukraine to Iraq have added to a flight-to-quality trade, boosting demand for Treasuries. With the size of incremental U.S. government borrowing also expected to decline because of shrinking federal budget deficits. Meaning interest rates will follow the path of least resistance and could move lower, forcing Treasury yields to follow suit.


Todays Other Top Stories

Learn Bonds

LearnBonds: – What Kinder Morgan consolidation means for income investors. – Last week, Kinder Morgan Inc. (KMI) announced that it will acquire all of the outstanding equity securities of Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR), and El Paso Pipeline Partners, L.P. (EPB), thereby creating the largest energy infrastructure company in North America. What does this consolidation into the largest energy infrastructure company in North America mean for income investors?  In particular, there are three things worth noting.


Municipal Bonds

Bloomberg: – New York’s East Hampton selling most bonds since ’06: Muni deals. – East Hampton, the Long Island town where billionaire Ronald Perelman and comedian Jerry Seinfeld own homes, is selling the most debt in eight years to replace equipment and make repairs after Hurricane Sandy.

Bloomberg: – Puerto Rico buoys hedge funds after agency reprieve: Muni Credit. – Puerto Rico bonds are set to extend the longest rally since May after the island’s cash-strapped electric agency won a reprieve from restructuring assets. Hedge funds, with a growing stake in the securities, stand to gain.


Bond Market

Bloomberg: – Why are bonds and stocks acting strangely? – The past week saw a dynamic in financial markets that, not long ago, would have been deemed quite unusual: Prices of all kinds of assets, from safe government bonds to risky stocks, rose together. The movements continued to confound the once-traditional pattern, in which bond prices rise and stock prices fall when investors expect the economy to perform poorly, and vice versa. There are various explanations, some more consequential than others.

Business Insider: – Bonds persist in their warning about the economy. – The Fed has been of the opinion since December that the economy is now in a zone of sustained recovery. It is tapering back its bond-buying QE stimulus at an impressive pace, and already debating when it will begin raising interest rates to prevent the economy from overheating. The bond market disagreed from the get go.

Inside Futures: – Bonds face decisive test in 2015. – Demand for U.S. Treasury bonds has risen even more steadily in 2014 than equities have, and this year’s rise in bonds is merely the latest in a series of advances from 2007. We expect bond prices to remain elevated at least through 2015. However, the question of whether they will make a new high depends on a combination of factors.

Businessweek: – Bond liquidity risk in $3.5 trillion funds defused by cash. – The record $3.5 trillion stockpiled in U.S. fixed-income funds is raising the specter the bond market will buckle under the strain of redemptions once interest rates rise. Simple math suggests there’s little need to worry.

FT: – Morningstar: A force to be reckoned with. – The research firm’s rating system gives it great power to influence the $30tn mutual fund industry.


Treasury Bonds

Bloomberg: – Treasuries fall on easing political tensions, 14-month-low yield. – Treasury 10-year notes fell for the first time in four days as yields at almost the lowest level in 14 months and easing geopolitical tensions from Ukraine to Iraq eroded demand for the safest securities.


Investment Grade

WSJ: – Banks, financial firms load up on cheap debt. – Banks and other financial companies world-wide are issuing bonds in the U.S. at a record pace, taking advantage of this year’s surprising slump in interest rates and a brightening outlook for the sector.


High Yield Bonds

FT: – Investors buy junk bond recovery more time. – Defaults low and returning investors still seek high yielding assets.

Business Insider: – Kinder Morgan deal favors bold lenders: Corporate finance. – Richard Kinder has created a windfall for bondholders brave enough to invest in his energy empire’s riskiest securities. More cautious lenders will have to be content with clipping their coupons.

WSJ: – $1 Billion Atlantis-backed bonds sell at higher yields. – Three banks sold $1 billion in mortgage bonds backed by a loan to the Atlantis resort and gambling complex in the Bahamas, after repeatedly raising yields to attract investors.

WSJ: – Big investors snap up junk bonds. – Large institutions are snapping up U.S. junk bonds, taking advantage of a price slide triggered by an exodus of individual investors.

ETF Trends: – Traders pay up to short junk bond ETFs. – A recent surge in distaste for high-yield bond exchange traded funds is highlighted by several anecdotes, including the willingness of professional traders to pay up to short such ETFs.

CNBC: – High-yield still worth owning: BlackRock. – Despite the increasing flight of money from U.S.-based junk bonds, the asset class remains a solid investment for the time being, BlackRock’s Jim Keenan said Monday.


Emerging Markets

Bloomberg: – Ex-IMF’s Kato concerned Bernanke shock faced by emerging markets. – Emerging markets are at risk of revisiting last year’s “Bernanke shock” should the Federal Reserve signal an end to near-zero interest rates earlier than investors anticipate, according to Takatoshi Kato, once a deputy managing director at the International Monetary Fund.


Catastrophe Bonds

Reuters: – Insurers can withstand $100 bln natural catastrophe -Zurich. – The growing market for catastrophe bonds has bolstered the insurance industry to the extent it could cope with a $100 billion disaster – bigger than that of Hurricane Katrina, the head of Zurich Insurance’s general insurance division said.


Investment Strategy

Stock Traders Daily: – Shorting the U.S. Treasury bond with ETFs. – Global economic concerns are real. Domestic economic concerns are real. Bond market investors are traditionally smarter than stock market investors. Do you really want to short the long-term U.S. Treasury bond?


Bond Funds

Market Wired: – PIMCO Plans to launch three new ETFs; Will close four others. – PIMCO intends to launch three new actively managed exchange-traded funds (“ETFs”) — the PIMCO Fundamental IndexPLUS AR Active ETF, the PIMCO International Fundamental IndexPLUS AR Strategy Active ETF and the PIMCO Foreign Bond Active ETF (US Dollar Hedged). While closing four underperforming funds.

Investment News: – Vanguard takes keys to Pimco’s bond kingdom. – The low-cost provider tops Pimco in bond assets in what may be interpreted as a triumph for index-based investing.

USA Today: – Mutual fund investors aren’t going crazy — yet. – he stock market may be having a party, but mutual fund investors aren’t coming. The Standard & Poor’s 500 stock index soared 29.6% in 2013, and has tacked on another 4.5% in 2014, but fund investors aren’t throwing money at the market. In some cases, they’re running the other way.

Investorplace: – What’s the SEC’s problem with alternative mutual funds? – The Securities and Exchange Commission has opened a broad examination of alternative mutual funds. Alternative mutual funds are like hedge funds for the small investor. They employ hedging strategies, such as going short on stocks or using options and derivatives or similar ways to bet against the market. However, packaging and marketing them in the form of mutual funds makes them accessible to a much larger investor community.

Investment News: – Proliferation of ETFs both good and bad. – Just when one might have thought all the available niches for exchange-traded funds had been occupied, a couple new ones appear on the market. The most recent one tracks the stock holdings of 10 highly successful investors, such as Warren Buffett, David Einhorn and Carl Icahn.

Focus on Funds: – Bond closed-end funds: Cheaper still. – The quirky world of closed-end funds is getting cheaper — including the few types of funds which rose in price last month.


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