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Bullish U.S. investors blindly investing money into the high-yield bond market, need only look across the Atlantic to Europe for a reminder of just how quickly the junk bond market can change.
September has dealt investors some nasty surprises in Europe with U.K. mobile-phone retailer Phones 4u collapsing after operators Vodafone and EE pulled out of vital contract talks.
As a result the company’s £430 million ($708 million) senior notes plummeted from just above par—a level indicating investors expected them to be paid off early next year—to 20% of face value in just a few days.
Other lower-rated names have also seen sudden moves. Bonds of German small-arms maker Heckler & Koch fell 30 points as Moody’s cut the company’s rating to Caa3. As a result, returns have been turned on their head. Safer double-B rated bonds have retained their poise, but returns on triple-C bonds year-to-date have fallen to 4.8%.
Both of these incidents are a warning shot across the bows of bullish investors. While central banks have succeeded in reducing systemic risks and thus preventing defaults from running out of control, they can’t stop companies with fundamental problems running into trouble. In Europe, extremely slow growth poses a threat to highly leveraged borrowers.
With yields so low, junk bonds will remain in demand. Bankers think there could be another €20 billion-€30 billion of issuance this year alone. But investors should put borrowers under greater scrutiny, and demand higher returns and better structural protections.
Todays Other Top Stories
LearnBonds: – FOMC decision both hawkish and dovish. – Wednesday’s Fed’s statement, as well as Ms. Yellen’s comments, was sufficiently ambiguous that one could interpret them as either more dovish or more hawkish simply by focusing on one sentence or another. Judging by the markets’ responses, it appears as though equity market participants consider the comments to be more dovish while fixed income market participants seem to view Fed language as more hawkish. The truth is that they could be interpreted as both hawkish and dovish when viewed in the context of potential scenarios.
BondBuyer: – SEC could halt muni bond sales. – The Securities and Exchange Commission will probably use emergency court action to stop state and local governments from selling municipal bonds if it thinks their offerings are fraudulent, an enforcement division official told bond lawyers meeting here.
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.
GMS Group: – What are the advantages to tax-free municipal bonds? – Tax-free municipal bonds can be an attractive investment for individuals seeking a steady source of tax-free fixed income, particularly for ”High Net Worth” individuals. Their typical combination of relatively high safety of investment, predictability of income, and tax exemption make them a popular choice for the fixed-income component of an investment portfolio.
ETF Trends: – Rising state spending could hinder muni ETF rally. – Slowing down the rally in municipal bond exchange traded funds, the muni market expanded last quarter for the first time in over a year, with issuers from California to New York set to sell billions in debt offerings over the next month, the largest wave of supply since December.
BondBuyer: – Foreign investors build muni market clout. – Foreign investors’ holdings of United States municipal bonds rose 12% in the first half of the year, increasing demand as supply of the debt has dwindled.
Janney: – Monthly municipal bond market review. – We are Seeing Cracks in the U.S. State Sector and an Unprecedented Multi-Year Run of Credit Deterioration by Some Local Governments.
MarketWatch: – Are stock and bond traders really reading Fed differently? – Bond traders look at Janet Yellen and see a central bank chief ready to raise rates next year at a slightly faster pace than previously imagined, while stock investors supposedly see a dove, more worried about a weak job recovery.
WSJ: – U.S. Treasury market goes off script. – (Subscription required) The crosscurrents roiling the bond market intensified Thursday, as the gap between short- and long-term U.S. Treasury yields narrowed in the latest sign of uncertainty over the pace of U.S. growth.
WSJ: – U.S. government bonds rise after two days of selling. – (Subscription required) Treasury bonds strengthened Friday for the first time in three days as higher yields attracted buyers.
CNBC: – Bonds mostly flat as risk-off bid wanes post-Scotland. – U.S. Treasury prices were little changed on Friday as long maturities with relatively fat yields put up the best gains at the end of a trading week dominated by Federal Reserve policymakers and a failed referendum that could have broken up Britain.
Businessweek: – Deutsche bank sees $300 billion stash debunking credit doomsday. – It’s natural for bond buyers to be pessimists. It’s part of their DNA. But they’re taking the whole role of worrier too far by giving in to the pervasive concern that a credit-market Armageddon is coming, according to strategists at Deutsche Bank AG.
High Yield Bonds
MoneyNews: – Investors withdraw $1.2 billion from junk-bond funds. – Investors pulled $1.2 billion from U.S. funds that buy high-yield bonds, the largest weekly outflow since a record $7.1 billion during the first week of August, according to data provider Lipper.
Smarter Investing: – The case for investing in high-yield bonds now. – High-yield debt or “junk” bonds have gotten more attention from income-starved investors in recent years due to rock-bottom interest rates.
S&P Capital IQ: – U.S. high yield bond funds see $1.2B investor cash outflow. – Retail-cash outflows from U.S. high-yield funds expanded to $1.2 billion in the week ended Sept. 17 from $766 million last week, according to Lipper. Although redemptions increased, the influence of ETFs moderated to 24% of the sum, or an outflow of $284 million this past week, from 58% the week prior.
IFR Asia: – American Airlines leads post-Fed US high-yield supply. – A benchmark unsecured bond from American Airlines (AA) blazed the way in a US high-yield market that saw four drive-by deals Thursday as issuers seized upon a more positive tone to move forward with trades.
WSJ: – Europe’s junk-bond market gets a risk reminder. – Europe’s high-yield juggernaut has hit a pothole. The broadly market-friendly outcomes from this week’s U.S. Federal Reserve meeting and the Scottish referendum smooth the road a little. But investors need to be more choosy than ever about which bonds they buy.
Bloomberg: – Ares selling $2.4 billion of crisis-era debt as peak seen. – As the credit crisis worsened in 2008, Merrill Lynch & Co. sold $2.4 billion of debt backing takeovers of companies to Ares Management LP at a discount.
MoneyBeat: – Vanguard reaches $3 trillion in assets, matching entire hedge-fund industry. – An asset manager selling index funds from a leafy suburb of Philadelphia now has about the same amount of assets under management as the entire hedge fund industry.
Zacks: – Bond funds in focus as Fed takes ‘considerable time’ to hike rates. – The primary forms of bond risk include default risk and the interest rate risk. The latter is obviously the most important these days. It was expected that the Federal Reserve will not announce a rate hike, and it did not. In fact, the central bank reassured investors that the low rate will continue for “a considerable time” after the bond repurchase program ends as the economy faces “significant underutilization of labor resources.”
Reuters: – Bond funds worldwide post biggest weekly outflows of 2014 -BofA. – Investors worldwide pulled a net $3.8 billion out of bond funds in the week ended Sept. 17 on rising fears of an early rate hike from the Federal Reserve, data from a Bank of America Merrill Lynch Global Research report showed on Friday.
Bond Buyer article about foreign investors having increased clout in muni market. They hold $77 billion of a $3.7 trillion market. Clout?
— Kristi Culpepper (@munilass) September 19, 2014
weekly supply/demand #muniland chart also showing yields up with issuance as inflows slow. rates finally increasing?
— Taylor Riggs (@TaylorRiggsMuni) September 19, 2014
— Hello, Janet. (@cr3dit) September 19, 2014