Junk Bond Covenants Drop, Increased Defaults Coming and Today’s Other Top Stories

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One of the key metrics used to measure the strength of investor protections in the junk bond market deteriorated to a record low in the 12 months ended September, according to Moody’s Investors Service.

Moody’s covenant-quality index, which measures investor protection on North American high-yield debt averaged over three months, uses a five-point scale from 1.0 for the strongest investor protections to 5.0 for the weakest. Climbed to 3.64 from 3.41 in the year ended August, analysts Alexander Dill and Kyle Goodwin wrote today.

The news comes as corporate issuers sold a record $56 billion of dollar-denominated junk bonds in September, up 33% from a year earlier, as corporations rushed to lock in low rates ahead of rising rates caused by the Fed “tapering” its $85 billion a month bond buying program.

“Investors’ continuing appetite for higher yields amid still-low rates on U.S. Treasury bonds has driven speculative-grade corporate bond issuance higher and covenant protections lower,” Goodwin said in a statement.

Covenants in speculative-grade debt offerings deteriorated in 21 out of 27 non-financial corporate sectors and subsectors over the 12-month period, according to the report.

The news comes after Martin Fridson, Chief Executive of New York based FridsonVision LLC, a research firm specializing in speculative-grade debt. Warned that junk bond defaults will increase to $1.6 trillion between 2016 and 2020.

Fridson says, “for the time being, ultra-low default rates have emboldened investors to essentially ignore credit risk while bidding up junk bonds, but at some point credit risk will rear its head again, and in a pretty big way.” So the writing is on the wall, don’t say you haven’t been warned.


Todays Other Top Stories


Municipal Bonds

TheStreet: – Muni bonds for income and tax savings. – It’s tough to find yield in fixed-income markets but one currently unloved sector to potentially consider is municipal bonds, especially for taxable accounts.

Chicago Tribune: – Chicago bonds hold up in light trading after downgrade. – U.S. municipal bonds issued by Chicago held up in light trading on Monday even as the city’s debt suffered another triple-notch ratings downgrade on mounting concerns about its public pension liabilities.

VC Post: – Hedge funds find their way to invest in municipal debt market. – A number of hedge funds are betting and betting large on municipal debt, as it returns the use of aggressive tactics to the so-called humdrum market with a net worth of USD3.7 trillion.

MuniNetGuide: – Can municipal marketing help save your city? – Cash-strapped cities, take note: An untapped source of revenue may be right under your nose.  Many private sector businesses are ready and willing to guarantee public funding in exchange for access to public sector assets.


Treasury Bonds

MarketWatch: – Dennis Gartman: If it’s Yellen, you should be sellin’ bonds. – Dennis Gartman is sounding the alarm: a bear market is coming in bonds. Janet Yellen, nominee to take over as chair of the Fed, heads to Congress on Thursday for her confirmation hearing. If she takes over as leader of the central bank, she will inherit a Fed that “wants a more positively sloped yield curve,” Gartman said. The front end of the yield curve will likely stay anchored, as the Fed has committed to keeping its key interest rates low, but the taper is likely to push out the long end of the curve. That means the bonds many investors hold in their portfolio will be worth less.

Bloomberg: – Vanguard bond chief says losses aren’t locked in when Fed tapers. – A reduction of quantitative easing by the Federal Reserve needn’t be a harbinger for losses with growth slow and inflation subdued, according to Gregory Davis, named last week as head of fixed income at Vanguard Group Inc.

IndexUniverse: – SSgA plans floating rate Treasurys ETF. – State Street Global Advisors, the second largest ETF issuer in the U.S. by assets, has put in registration a fixed-income ETF that would serve up access to floating-rate Treasurys—a brand new security that doesn’t come to market until January of 2014.


Investment Grade

Learn Bonds: – Taking a look at Freeport-McMoRan and its bonds. – Income-focused investors looking to add exposure to basic materials should consider Freeport-McMoRan Copper & Gold.

FT: – Banks rush to secure low-cost financing. – Sales of investment grade bonds by financial institutions may surpass the $30bn mark in coming weeks as global banks attempt to raise this year’s final batch of funds at low borrowing rates.

Reuters: – Hedge fund Rhodium debuts with bet on corporate bonds. – Hedge fund start-up Rhodium Capital, run by former Bank of America star trader Iftikhar Ali, has begun life betting on a strong performance from corporate bonds over coming months.


High Yield

CNBC: – High yield bonds have run their course. – Thomas Strauss, Cowen Group vice chairman, explains why he believes fixed income prices are high, and it’s time for investors to consider moving into equities.

Elliott Wave: – Beware of optimism in the bond market. – Elliott Wave International believes that the major shift in the direction of bond yields that started in 2012 is far from over.

CreditFlux: – Retail investors dump Blackrock US high yield ETF. – Last week saw outflows from US high yield ETFs outpace that from investment grade ETFs. However, this was almost entirely down to investors dumping a single fund, Blackrock’s $15.9 billion iShares iBoxx $ High Yield Bond Fund.

Moody’s: – Moody’s: High-yield bond covenant quality deteriorates across most corporate sectors. – North American high-yield bond covenant quality deteriorated across 21 of 27 non-financial corporate sectors and subsectors in the 12 months ended in September, Moody’s Investors Service says in a new report, “Most North American Corporate Sectors See Bond Covenants Weaken Further.”


Emerging Markets

Forbes: – J.P. Morgan USD emerging markets bond getting very oversold. – In trading on Monday, shares of the iShares J.P. Morgan USD Emerging Markets Bond ETF entered into oversold territory, changing hands as low as $108.02 per share. We define oversold territory using the Relative Strength Index, or RSI, which is a technical analysis indicator used to measure momentum on a scale of zero to 100. A stock is considered to be oversold if the RSI reading falls below 30.

FT: – Singapore debt feud tests emerging bond markets. – A fight has erupted between a group of institutional investors and the owners of Singapore semiconductor company UTAC over a debt swap that will test governance standards in emerging bond markets.

ETF Trends: – Corporate versus government debt in emerging markets. – When investors think of emerging market (EM) growth, they are often drawn to emerging market equities as their first and only stop. But with the path of interest rates now potentially “lower for longer” under a Yellen Federal Reserve, bond market investors appear to be resuming their global hunt for yield. In our view, emerging market corporate bonds may represent an attractive option for investors who believe in the emerging market story but want to participate in a lower-volatility, higher-income approach than emerging market equities.

William Gamble: – Precarious situation of emerging market corporate debt. – So far the flood of cheap money has not had a bad effect in developing or emerging markets. Default rates on corporate bonds in developed markets have been very low. The rate is similar to the levels seen between 2005 to 2007 at 2.4%. But with low cost easy money, more middle market firms have had access to funds. But access to money does not necessarily mean profit growth.


Catastrophe Bonds

Artemis: – More detail on USAA’s residential reinsurance 2013-2 cat bond. – Residential Reinsurance 2013-2 launched to investors last week and sees USAA looking to secure another source of fully-collateralized, capital markets backed, multi-peril and multi-year reinsurance protection from insurance-linked securities investors. Artemis has received some more detail on the transaction through conversations with investors and rating agency Standard & Poor’s pre-sale report for the deal, which covers one of the two tranches on offer.


Bond Funds

Income Investing: – Bonds weaken again as market tries to prep for taper. – It’s become an endless exercise for the bond market, trying to position itself to anticipate the Fed’s eventual wind-down of its $85 billion monthly bond purchases. Markets thought they had it right in September, only to be proven wrong when the Fed surprised everyone by saying it wasn’t ready to taper yet. Even though there’s still another month of economic data to digest – including the November jobs report – before the Fed meets again, the bond market is pricing in a higher probability of a December taper following the unexpectedly strong October jobs report.

Minyanville: – Searching for income in a low interest rate environment. – Investors are scrambling to get higher yields while also trying to protect against capital loss if and when interest rates start climbing. To develop securities to fill this need, ETF-makers are combing the globe, looking for short-term debt of riskier companies. There is short-term debt in both US and emerging markets that merits consideration.

Bloomberg: – Bond exodus at broad funds hits Pimco, JPMorgan. – In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. to JPMorgan Chase & Co.

Deseret News:  – Utah bond fund changes name. – The Aquila Group of Funds announced Monday that the municipal bond fund formerly known as Tax-Free Fund For Utah is now called Aquila Tax-Free Fund For Utah.

USA Today: – 5 financial to-do’s for retirees and 1 don’t. – The world of finance is complicated. If you are contemplating any kind of sophisticated investments, you should get professional help. But people who focus on these five fundamentals – and heed the one warning – will go a long way toward securing their financial future.



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