Junk Bond Issuance Hits Record As Taper Looms and Today’s Other Top Stories

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With the market eagerly anticipating tomorrow’s non farm payrolls report, for clues as to when the Fed will announce the scaling back of its $85 billion a month bond buying program. A flurry of lower-rated borrowers, have filed last minute offerings in an effort to lock in lower interest rates.

This weeks combined junk sales are expected to surpass the $5bn mark according to the FT. Helping push this year’s total sales of the debt to a record high of $339bn, according to Dealogic.

There is no shortage of takers for these bonds as investors desperately search for yield in the current environment. Vivianne Rodrigues writes that “Investors are betting that as long as the Fed keeps on trying to suppress interest rates, and as long as corporate default rates – currently 2.3 per cent per year – remain below historical norms, the prospect of losses on junk bonds is limited.”

Ed Marrinan, head of macro-credit strategy at RBS Securities, says. “Based on the rates of subscription to these deals that we’ve been seeing, the urgency of the need for yield today may be trumping the risks that may emerge down the road should rates rise too much or the economy slows.”

Default rates should remain low in 2014, as the Fed tries to keep a lid on interest rates, but investors should “not be complacent” as total returns for investment grade and junk bonds will range from negative low single-digits to positive low single-digits, according to analysts at UBS.


Todays Other Top Stories

Municipal Bonds

Bernardi Securities: – A Century of tax-exempt municipal bonds: The good, the bad and the ugly. – As the repeal of federal income tax-exemption of municipal bond interest continues to be a threat, let’s review talking points to share with lawmakers. These are based on thorough research and a thirty-two year career perspective of municipal bonds.

Bloomberg: – Illinois trading near junk means buy on pension fix. – Illinois municipal bonds are set to rally from near-junk yield levels after lawmakers passed measures to help fix the worst-funded U.S. state pensions.

Reuters: – Bank of America settles muni bond rigging lawsuit. – Bank of America Corp has agreed to pay $20 million to settle a lawsuit in which investors accused it of rigging bids for municipal securities, court papers filed on Wednesday show.

WSJ: – State muni funds take a liking to Puerto Rico. – Massachusetts, Pennsylvania and Oregon tend not to conjure up thoughts of Caribbean sun and palm trees—unless you’re a manager of a municipal-bond fund aimed at investors in those states.

Philliy.com: – Your Money: How investors minimize capital gains taxes. – UBS holds a house view that in 2014 the stock market could register another year of 7 percent to 8 percent gains, bringing the S&P 500 to 1,850 over the next six months. Its forecast for the 10-year Treasury is that it will yield 3.3 percent in 12 months, up from 2.8 percent currently. Many investors likely need to take some profits in stocks and put that money to work in municipal bonds, Garvey said.

BusinessWeek: – Illinois trading near junk means buy on pension fix. – Illinois municipal bonds are set to rally from near-junk yield levels after lawmakers passed measures to help fix the worst-funded U.S. state pensions.

Northern Trust: – Tim McGregor on recent muni market headlines and opportunities. – 4th year in a row muni market will shrink: new debt less than maturities due to issuer fiscal prudence.

Bloomberg: – Pension threats in Illinois, Detroit rattle government workers. – Bev Johns sat before Illinois lawmakers and asked why they hated teachers. The 67-year-old retired special-education teacher and administrator from Jacksonville thought she had a secure pension in return for 34 years of work. She wanted the people considering reducing benefits to rescue the worst-funded U.S. state pension system to know whom they were affecting.

Barron’s – The end of the beginning of mending muni finances. – Watershed events in any field of endeavor are rare, but when two happen in the same week it’s nothing short of extraordinary. On Tuesday, a federal judge ruled that Detroit could proceed with its bankruptcy filing, the largest of any city to date. The same day, the Illinois legislature approved reforms in the state’s public pensions, the most troubled in the nation. Both actions should be viewed as steps to correct the same problem; that is, governments have incurred obligations they cannot keep.

WRDB: – Kentucky bridge bonds rated one step above “junk”. – Credit rating agencies have weighed in on $747 million in bonds Kentucky plans to sell next week to finance its share of the Ohio River Bridges Project.

Yahoo Finance: – I like municipal bonds for 2014. – Suni Harford of Citigroup explains why she thinks municipal bonds are attractive for 2014. “We have historically seen a huge bounce back in municipals,” she says.


Treasury Bonds

Learn Bonds: – The Fed tapering playbook – Bill Gross style. – Bill Gross, Manager of PIMCO’s Total Return Fund, believes that short-term Treasury yields will remain the same despite Fed tapering. In other words, the nation’s most prominent bond investor believes that Fed tapering will have little no effect on interest rates. Why does he think that?

WSJ: – U.S. to sell $13 bln in reopened 29-year 11-month bonds Thu. – The U.S. Treasury plans to auction $13 billion in reopened 29-year 11-month bonds Thursday. The debt will settle on Dec. 16, 2013 and will mature Nov. 15, 2043.


Investment Grade

BusinessWeek: – U.S. Corporate debt seen hurt by Baucus undoing 1984 law. – U.S. companies could encounter higher borrowing costs under a congressional tax plan that would reverse a 29-year-old policy making it easier for other countries’ residents to invest in U.S. corporate debt.


High Yield

New River Investments: – The low returns of high yield. – Over the last few weeks, as high yield indices’ yields have continued to fall, we have seen a lot of commentary from talking heads about a potential bubble in high yield corporate bonds. This talk is often accompanied with, at worst, a chart of the HYG share price and, at best, a chart of the yield of a high yield index. These are inaccurate and incomplete indicators of risk, prospective return, and future return attribution. In this post I hope to illustrate how someone whose only career objective is to maximize P and minimize L should approach and quantify expected risk and returns.

Market Realist: – Why bond investors should favor high yield over investment grade. – This week’s economic data releases have a shared theme: continued slow and steady economic recovery. As business conditions improve, the risk of default falls for companies that issue debt. Since high yield companies (HYG) are riskier than investment-grade companies (LQD), economic improvement helps them more than it does the stalwarts.


Emerging Markets

BusinessWeek: – Bonds risk first annual decline in new millennium. Polish government bonds are headed for their worst performance since at least 1999, at risk of their first annual loss, on concern over the timing of the U.S. Federal Reserve’s planned stimulus reduction.

WSJ: – Emerging Markets debt fund launched by Northern Trust. – To offer investors exposure to the full spectrum of emerging markets debt with the potential for higher yields, diversification and an attractive risk-return profile, Northern Trust has launched the Northern Multi-Manager Emerging Markets Debt Opportunity Fund (NMEDX).


Bond Funds

Indexology: – Bond funds unbound. – Most broad market indices — whether they measure equities or bonds — are capitalization-weighted. Such an index will accurately reflect changes in the total market value of the asset class in question. One of the most important characteristics of any asset class is that there is no net supply of alpha. In other words, one manager can be above average only if another manager is below average.

Money Marketing: – Plan B for bonds. – Fixed income used to be a stalwart in many portfolios, producing returns and, in some cases, providing downside protection. But in today’s environment of historically low interest rates, quantitative easing and rising equity markets, bonds have been left in the dust.

e21: – We were right: QE can’t cure our economy. – A few years and trillion dollars of quantitative easing later, the position that a Fed-managed recovery will be subpar is supported by the evidence. It is important to compare this recovery, which began in June 2009, with the recoveries that commenced November, 2001, March, 1991 and November, 1982.

SFGate: – Gross runs Pimco unconstrained as Dialynas takes sabbatical. –  Bill Gross is taking over management of the Pimco Unconstrained Bond Fund, one of the firm’s most important offerings as clients pull out of its main bond funds, after its current manager Chris Dialynas leaves on a sabbatical.



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