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There is trouble brewing in the corporate bond market, and investors are showing little sign of heeding the warnings. To highlight the risk, Bloomberg profiles the bonds from Clear Channel Communications Inc. bonds that investors showed up in droves to buy last month.
Clear Channel carries debt that’s 12 times its earnings and a credit rating that implies a default is a virtual certainty, yet it was still able to more than double its offering to $850 million. Not only that, the indentures governing the notes designed to protect bondholders lacked restrictions typically found in such risky offerings, such as limits on the company’s ability to issue more debt or shift cash to shareholders.
In previous periods such terms were generally relegated to the highest-rated junk bonds, or those graded with ratings in the Ba tier, just below investment-grade, said Mark Scioscia, an analyst at the New York-based ratings firm.
But these new Clear Channel bonds, have a rating of Ca, the second-lowest on the Moody’s scale and described by the credit grader as “highly speculative” and “likely in, or very near, default.”
So should investors take a closer look at the bonds they’re buying? Gershon Distenfeld, director of high-yield debt at AllianceBernstein Holding LP says they should. “While protections have deteriorated across the high-yield market, debt issued with looser covenants is especially pronounced in the loan market. That’s a consequence of investors “throwing money into the asset class rather blindly,” Distenfeld told Bloomberg.
“We own almost no loans, even though we have the ability to own a lot,” Distenfeld said. Covenants are falling by the wayside as the fear of rising interest rates push investors into loans that pay a floating coupon, he said. “It’s definitely not a good thing.”
Todays Other Top Stories
San Marcos Mercury: – San Marcos’ municipal bond rating upgraded to AA. – The City of San Marcos has been granted an upgrade in its Standard & Poor’s long-term bond rating from “AA-“ to “AA” on outstanding general obligation debt, an improvement that will save taxpayers money on repaying debt that finances major capital projects.
Income Investing: – Watch out for muni weakness ahead – LPL. – Strategists continue to wonder aloud whether the muni market, coming off a fantastic start to 2014, is due for some losses between now and the end of the year. Anthony Valeri, fixed-income strategist at LPL Financial, offers his own skeptical take today.
Bizjournals: – George K. Baum & Co. adapts to rapidly changing market. – Municipal bonds have been the core business for Kansas City-based George K. Baum & Co. for 86 years, but rapid change throughout the industry is forcing the company to adapt.
Market Intelligence Center: – First Trust rolls out managed municipal bond ETF. – Muni bond ETFs saw a bumpy 2013 thanks to investors’ inclination toward equity markets, the low-return nature of muni bonds, poor fiscal health in many municipalities and taper talks that spoiled the flavor of all sorts of long-duration bond investments.
LearnBonds: – When will rates finally normalize? – During the first half of 2009, when longer-term Treasury yields were soaring and the consensus among bond-market pundits was that Federal Reserve rate hikes were not that far off, people would have thought you were nuts if you said short-term rates wouldn’t normalize for decades. I still remember some of the reactions I received when telling people I didn’t think the Fed would raise rates for many years to come.
WSJ: – Treasury bonds rise, breaking up two days of selling. – Treasury bonds strengthened Friday after two days of selling lured buyers to step in at cheaper price levels ahead of a long weekend.
FT: – Central bank trickery sets stocks and bonds at odds. – A sublime skill of a Jedi knight is playing mind tricks – persuading others of something that is not necessarily true. Investors have this week wondered whether financial markets are living in a Star Wars film, as a striking divergence has emerged between the two asset classes that underpin the financial system.
Donald van Deventer: – Forward T-Bill rates twist, with projected 10-year Treasury yields up 0.17% in 2024 from last week. – Projected one-month Treasury bill rates showed a surge and a twist this week, with rates in 2020 up by as much as 0.15% and rates in 2015 down by 0.05%. Forward 1-month T-bill rates are now projected to peak beyond the ten-year horizon of the forecast, rising steadily to 3.83% in April 2024, up 0.06% from last week.
WSJ: – Investors snatch up Treasury inflation-protected securities. – Investors are buying up U.S. Treasury bonds that protect against inflation, sending the yield on Treasury inflation-protected securities to its lowest level since June, the latest sign some investors see rising prices as a threat amid tepid economic data.
WSJ: – Credit Suisse sells $5 billion in debt after guilty plea. – Bond investors shrugged off a recent guilty plea from Credit Suisse Group AG, lining up for a $5 billion debt sale from the Swiss bank on Thursday.
High Yield Bonds
YCharts: – Dividend stocks vs. junk bond yields. – After kissing 3% at the start of the year, the yield on the 10-year Treasury is down nearly a half a percentage point. Investors with a core bond allocation tied to the Barclay’s Aggregate Bond Index aren’t exactly raking in income either. Meanwhile, diving into the junk pool means accepting record-low reward for what can be a very risky investment.
Forbes: – Retail cash inflows to high yield bond mutual funds continue for 3rd consecutive week. – Retail-cash flows for high-yield funds were positive $744 million in the week ended May 21, following a $472 million inflow last week and a $368 million infusion the week prior, according to Lipper. Unlike recent weeks, however, the inflow was dominated by exchange-traded funds, at 59% of the sum.
Boston Globe: – Warning signs are flashing for junk-bond investors. – Junk bonds have been strong investments since the recession, and investors continue to pile into the market. But fund managers say they’re looking less attractive. Many are taking a step back and urging investors at least to temper their expectations.
Citywire: – Milburn lets rip over ‘insulting’ bond issuances. – Kames bond veteran Philip Milburn has warned that some firms are ‘abusing the bond market’ in order to gain access to bank-like funding.
Bloomberg: – Aberdeen appoints Dahiya head of emerging-market corporate debt. – The appointment comes after the departure of money manager Esther Chan, who left for a similar position elsewhere, the Aberdeen, Scotland-based company said today in a statement. Dahiya, who began at Aberdeen in 2010, will continue to report to Brett Diment, the head of emerging-market and sovereign debt.
WSJ: – The death of emerging markets was much exaggerated. – For the eighth straight week in a row, emerging market debt funds enjoyed inflows last week, with $500 million heading into the asset class, data from EPFR Global and Bank of America Merrill Lynch show Friday.
WSJ: – Meteor bonds. Oh yes. – Yes, bonds that allow investors to bet against natural disasters have a new risk to wager on: meteor strikes. United Services Automobile Association, an insurer, is poised Thursday to issue the first ever catastrophe bond that will hinge in part on space rocks hitting the U.S.
Morningstar: – The impact of rising rates. – How will your bond and stock holdings fare when the climb commences? At some point, interest rates will climb again. But that day keeps getting pushed into the future. When it does come, how will your bond and stock holdings fare? Some history may help give an answer.
Securities Lending Times: – Bond ETFs aren’t cheap to borrow, finds Markit. – Bond exchange-traded funds are among the most expensive to borrow in the US ETF market, according to Markit Securities Finance.
Washington Post: – Mutual fund fees are falling, investors smiling. – Mutual funds charged less to cover operational expenses last year, as a percentage of their total assets. It was the fourth straight year that the average expense ratio fell for stock mutual funds, according to separate reports from the Investment Company Institute and Morningstar.
FT: – Checking out of the ETF hotel could be costly. – Hotel California by the Eagles is one of the best known soft rock songs from the seventies. But its lyrics – about a seemingly welcoming guesthouse revealed as a ghostly limbo – offer a partial analogy for an important part of modern financial markets: exchange traded funds.
Gross: What is PIMCO’s New Neutral Fed Funds rate and when do we reach it? 2% in 2017 best guess for now.
— PIMCO (@PIMCO) May 23, 2014
— AnthonyValeri (@Anthony_Valeri) May 23, 2014
Things I don’t hear “Pete, you look good for your age” “we need a plan in case the 10 year goes to 2.0%”
— Peter Tchir (@TFMkts) May 23, 2014