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Investors Driven Dotty by Fed and Today’s Other Top Stories

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Understanding the subtle nuances of Federal reserve policy statements is an acquired skill, but yesterday’s statement was enough to tax even the most seasoned of analysts. With  forecasts of future rate moves from the U.S. central bank sending them dotty.

It wasn’t so much the language that mattered, more the Federal Open Market Committee’s indication on Wednesday – via its now famous “dots” chart – that interest rate hikes would arrive at a faster pace than expected in 2015 and 2016.

To see a list of high yielding CDs go here.

These future projections of the overnight federal funds rates in the coming years by each member of the FOMC are mapped out as a series of 16 dots and provide a snapshot of what they think is an appropriate pace of policy firming.

The confusion arose because investors were told via the statement that the current near zero rate policy will remain in place for a ”considerable time” after quantitative easing concludes next month. The “the dots chart” projection, however, indicates that rate hikes will assume a faster pace once the central bank starts tightening.

“The bond market and the stock market are paying attention to different portions of the statement,” says Adrian Miller, director of fixed-income strategy at GMP Securities told the Financial Times (subscription). “The bond market is less concerned about when interest rates will rise and more worried about how fast rates will rise and to what level.”

 

Todays Other Top Stories

Learn Bonds

LearnBonds: – Forward guidance says rates to remain as-is for an “extended period”. – Signals coming from the Federal Reserve System in the United States suggest that short-term interest rates will remain at or close to current levels until the middle of 2015.  The effective Federal Funds rate, the policy rate of the Federal Reserve has averaged around nine basis points for most of this year.

 

Municipal Bonds

Reuters: – U.S. Treasury will monitor bank liquidity rule’s impact on munis: official. – The U.S. Treasury will monitor the impact of a recent bank liquidity rule on the cost of new municipal debt issuance, a federal official said on Wednesday.

WSJ: – Municipal-bond issuers find it’s easy being ‘green’. (Subscription required) Massachusetts, a pioneer in selling so-called green bonds for environmental projects, is going greener.

BondBuyer: – Treasury’s hiteshew warns of heightened scrutiny for munis. – Bankruptcies in Jefferson County, Ala. and Detroit, as well as regulatory and enforcement actions, have garnered increased scrutiny of the bond market in Washington, D.C. and market participants need to better understand the policymaking process, a key Treasury Department official told bond lawyers on Wednesday.

Reuters: – U.S. municipal bond market grows slightly in Q2-Fed. – The amount of outstanding U.S. municipal bonds grew slightly in the second quarter to $3.6614 trillion from $3.6608 trillion in the first quarter of 2014, Federal Reserve data released on Thursday showed.

BB Research: – A rare opportunity in the municipal bonds market. – Municipal Bond Insurance Association, is an excellent play in the municipal bond insurance market. During the financial crisis of 2008, MBIA got screwed. Our bull thesis for the stock is primarily based on the fact that historically the default rate for municipal bonds is incredibly low.

Bloomberg: – Biggest bond glut of ’14 imperils record debt rally. – It takes a nationwide effort to halt the $3.7 trillion municipal-bond market’s record winning streak. Benchmark yields are rising from a 15-month low as issuers from California to New York schedule about $14 billion of debt offerings in the next 30 days, amid the biggest wave since December, according to data compiled by Bloomberg.

MuniNetGuide: – Metro area GDP trends suggest potential population shifts in the making. – The majority of U.S. metro areas experienced economic growth in 2013, according to recent data released by the U.S. Bureau of Economic Analysis.

 

Bond Market

FT: – Investors shun US inflation bonds.(Subscription required) Investors are shunning US inflation bonds as a stronger dollar and lower commodity costs negate the need for owning insurance against the risk of rising consumer prices.

 

Treasury Bonds

FT: – Yield-hungry markets overlook credit risk. (Subscription required) Three years ago, the US lost its top-tier triple-A credit rating and markets were plunged into turmoil. In 2014, the vast majority of US companies are migrating down the credit ratings spectrum and investors are barely batting an eyelid.

WSJ: – U.S. government bonds pull back on Fed’s rate outlook.(Subscription required) Treasury bonds pulled back Wednesday for the first time this week as the Federal Reserve’s latest monetary-policy releases renewed worries about higher interest rates.

Jieming See: – Treasury bond watch: Neither shaken nor stirred. (Registration required) Despite the gradual reduction of treasury bond purchases by the U.S central bank and forecasts of higher rates in 2015, long-term bonds have outperformed in 2014.

 

Investment Grade

IFR Asia: – Fed slows U.S. high-grade issuance but Alcoa slips through. – The much-awaited Federal Reserve statement kept a lid on US high-grade issuance Wednesday, as borrowers largely stayed away to avoid any rates volatility.

MNI: – Foreign investors resume investments in Canada, focus on corporates. – Foreign investors resumed investments in Canadian securities in July, with a focus on corporate securities, mostly equities, Statistics Canada reported Thursday.

 

High Yield Bonds

MarketWatch: – This high-yield ETF is worth a close look. – How does an investor get yield in a low interest-rate environment? A handful of ETF providers have developed niche products as solutions to this very question. Relatively new to the marketplace is the ALPS U.S. Equity High Volatility Putwrite Index Fund.

About.com: – How likely is a high yield bond market crash? – Assessing the potential for severe downside in the financial markets is never easy, since crashes are so few and far between. Much more often than not, investors who position their portfolios for declining asset prices just end up missing out on upside without ever providing any true degree of protection.

Bloomberg: – Junk-bond traders got Yellen’s message, liked it. – Bond traders are reading Federal Reserve Chair Janet Yellen’s message as a sign it’s still a good time to plow into riskier debt.

 

Emerging Markets

AllianceBernstein: – In EM, beware commodity riches without policy smarts. – Fixed-income investors often divide emerging markets into commodity exporters and commodity importers. We think this overlooks an important reality: commodity wealth is not the sole—or even the most important—driver of EM performance.

Reuters: – Venezuelan bonds slump on ratings cut, economy concerns. – Venezuelan bonds tumbled on Wednesday following a ratings downgrade by Standard & Poor’s that further fueled worries about the country’s capacity to service debt amid soaring inflation and economic contraction.

 

Investment Strategy

InvestorPlace: – 3 ways you can use ETFs to cover your butt. – Worried about additional volatility and a drop-off in the coming months? Look to these strategies for help.

 

Bond Funds

MarketWatch: – Assessing the end of the Fed’s easy money regime’s impact on ETFs. – The primary capital market for bonds is for original sales of debt securities directly from issuers to purchasers. Bond sales could either be made by the government to finance its debt or by corporates wishing to undertake debt for a variety of reasons, including funding investments and acquisitions.

ETF Trends: – PIMCO steps into the ETF fee war. – In a rare occurrence, PIMCO cut the expense ratio on one of its actively managed exchange traded funds, revealing the stiff competition in the ETF space, even for an established fixed-income giant.

Reuters: – DoubleLine files with SEC to register long duration bond fund. – Jeffrey Gundlach’s DoubleLine Funds filed on Wednesday with the U.S. Securities and Exchange Commission to register shares of its Long Duration Total Return Bond Fund.

Reuters: – BlackRock, Goldman unconstrained bond funds double in assets. – Goldman Sachs and BlackRock Inc have seen their unconstrained bond funds double in size over the past 12 months as investors continue to search for yield in this low interest rate environment.

Dividend Channel: – 10 Top ranked high yield REITs. – The top ten performing high-yield REITs over the last twelve months.

 

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