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Now that the budget standoff is over, temporarily at least, what will happen to bonds? Right on cue, bond maven Jeffrey Gundlach appeared on CNBC to give us his thoughts.
“Interest rates in the U.S. don’t have any legitimate reason to go up.” Gundlach told CNBC. “The bond market rallied because there’s a little bit more clarity, but that’s not going to last very long…. The economic consequences of what Washington is doing seem to be skewed to the downside. This can has just been kicked down the road a very short distance. One grows weary of this endless conversation.”
Gundlach went on to say. “There was no reason to believe short-term interest will rise in the foreseeable future, making bonds an attractive investment. With quantitative easing likely to extend well into 2014, Gundlach said he expects to see money coming back into the bond market over the next few months.”
So what’s an individual investor to do? Gundlach recommends closed-end bond funds, saying many remain “really cheap” and can still be found trading at a 10% discount to their net asset values. “There’s plenty of yield in fixed income…. You can put together a portfolio that yields 8.5% or 9%. And you can get tax-free yields in the muni market that are very attractive.”
Todays Other Top Stories
WSJ: – Puerto Rico could see downgrade next year if unable to meet budget targets. – Puerto Rico could see a downgrade of its general credit rating by the middle of next year if it isn’t able to meet its budget targets, and the municipal bond market already views the island as a “junk” rated credit, the head of municipals for one of the largest money managers told reporters Thursday.
BusinessWeek: – Build America bonds biggest loser in yield-rise bet. – The $188 billion market for Build America Bonds is set to trail the rest of municipal debt for the first time as issuers face cuts to their federal subsidies while investors bet interest rates will rise.
4Traders: – OppenheimerFunds brave muni badlands with $2 billion Citi credit. – If Hollywood made a western about the municipal bond market, portfolio managers at OppenheimerFunds could be cast as the cowboys brave enough to enter the badlands of credit risk.
4Traders: – Fitch takes various rating actions on enhanced municipal bonds and TOBs. – Fitch Ratings has taken various conforming rating actions on enhanced municipal bonds and tender option bonds (TOBs) corresponding to actions taken on their associated enhancement providers or underlying bonds.
Learn Bonds: – Why this bond pro is betting against bonds. – John Mason takes a closer look at bond fund manager Stewart Crowleys bet against bonds, which we highlighted last week.
ECNS: – China’s U.S. debt holdings in doubt. – More Chinese economists are beginning to sound the alarm over the risk to China of holding more than $1 trillion in US Treasury bills, as efforts by the US Congress to raise the debt limit remain elusive.
Globe and Mail: – A better way to invest in Apple? bonds. – As painful as owning Apple Inc. shares has been in the past 12 months – at one point, they were down by nearly half from their high – investors could at least take comfort in the $100-billion-plus mound of cash that the company is gradually, grudgingly, giving up.
ETF Trends: – iShares launches short-duration corporate bond ETFs. – BlackRock’s iShares mints short-duration versions of its popular investment grade and speculative grade corporate debt exchange traded funds to help investors mitigate the effects of rate risk.
Money Marketing: – Is the future bleak for high-yield bonds? – High yield bonds are continuing to deliver strong performance but fund managers are warning that the quality of issuance could slowly start to deteriorate. As with other fixed income assets, high yield saw its share of challenges earlier this year as investors fled bonds amid mounting fears over tapering of the US quantitative easing programme.
The Economist: – An appetite for junk. – Companies have taken advantage of investors’ growing willingness to buy speculative bonds.
FT: – Renewed vigour for EMs favours Indonesian bonds. – The U.S. budget deal is done (well, kicked down the road in truth), while the Federal Reserve is now expected to extend its largesse to compensate for the economic damage caused by the government shutdown and political gridlock. Thus, with seasonal factors also likely to be supportive, many analysts see a window for more bullishness in which risk premiums will be reduced over the next few months. Which should be good news for emerging markets.
FT: – Goldman fixed income trading worst in class. – Goldman Sachs reported a worse plunge in fixed income trading than any other large Wall Street bank but protected its profits by slashing the amount of money set aside for year-end bonuses.
AllianceBernstein: – Investing in retirement: Bonds aren’t enough. – What should you invest in after the spigot of earned income is turned off? It’s a vexing question, especially since we expect lower stock and bond returns going forward.
Bloomberg: – Extended Fed taper to impact bonds, dollar. – Jeremy Stretch, head of FX strategy at CIBC, discusses the role of the Federal Reserve following the U.S. government shutdown, examines the bond and currency markets after the crisis and offers his outlook for when the Bank of England may raise rates.
BusinessWeek: – Bond investors said to mull consortium in trade talks with banks. – BlueMountain Capital Management LLC, Pacific Investment Management Co. and Fidelity Investments are among money managers that are in discussions to form a consortium that would seek ways to make it easier to buy and sell corporate bonds in the U.S.
Trustnet: – The best funds to replace cash in your portfolio. – FE Trustnet looks at the strongest absolute return bond funds, which aim to make money even in an environment where yields are rising.
FT Adviser: – Retail investors pile into absolute return bonds. – Absolute return bond funds are seeing a surge in popularity from retail investors as concerns mount about potential losses from traditional fixed income funds.
Forbes: – Bond alternatives for the coming sharknado. – The expected return of a bond is its yield. Problem: we live in a world where the Federal Reserve is keeping interest rates artificially low. A 10-year Treasury bond pays 2.7%, perhaps 1.2% after inflation in the best case. If inflation springs up along the way, which seems somewhere between likely and inevitable, this would leave us with a negative real return.
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.@FitchRatings: "Rocked Puerto Rico Muni Bonds Hold Tight" Describes turmoil over past few months of PR funds.
— Brian Chappatta (@BChappatta) October 17, 2013
Fed's Evans: Data needed for tapering decision.
— Ed Bradford (@Fullcarry) October 17, 2013