Managing Fixed Income Expectations and Today’s Other Top Stories

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Investors are having to come to terms with the fact that U.S. interest rates are likely to remain low for the foreseeable future, now that the long tailwind from a three-decade-long rate decline has subsided. But bonds still play an important part of your portfolio, so how should you think about fixed income going forward?

Alison Martier of AllianceBernstein says. “As with many segments of the global capital markets today, there aren’t many broad swaths of the bond market that are still cheap. This should keep bond returns generally modest going forward.”

But that doesn’t mean you should abandon fixed income altogether. Bonds continue to play a valuable role in your portfolio—whether it’s by generating a certain level of income or by acting as a steady counterbalance to the ups and downs of equity-market exposure. With that in mind, Ms. Martier has a few recommendations for investors to think about:

Fixed income isn’t over the hill. The bond market expects the moves to be even more gradual, and we expect some bouts of volatility as the Fed engineers the path to “normalization.” As interest rates rise, bond performance, particularly for high-quality bonds, is likely to be relatively modest. But we don’t think investors should worry about a major bond sell-off like the ones in 1981 or 1994.

Think global, but forget currency. The U.S. isn’t the only game in town when it comes to the global bond market. And the US economic and rate cycles don’t define what’s happening in other countries. The divergence we see developing in global growth, economic policies and interest-rate paths creates opportunity for bond investors.

Diversify in credit and avoid crowds. Credit exposure has historically provided insulation against rising rates. That’s because rising rates are often driven by stronger economic growth, and stronger economic growth means better business conditions for corporate bond issuers.

Manage liquidity risk—but don’t miss opportunities. During times of stress, market activity tends to dry up. When this happens, the required yield spread on less liquid investments balloons and prices fall. The cost of liquidity expands or contracts based on market conditions—in times of stress, liquidity costs are higher.

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Todays Other Top Stories

Learn Bonds

Learn Bonds: – The decumulation of equities will provide future support to bonds. – Now seems like an appropriate time to remind investors of something Morgan Stanley Research published in late 2013. It concerns baby boomers and what Morgan Stanley terms the “decumulation phase” that could strain the financial markets beginning just a few years from now.


Municipal Bonds

Bloomberg: – Munis poised for biggest October gain since 2000 amid bond rally. – The $3.7 trillion municipal market is poised for its biggest October rally in 14 years, pushing yields to 16-month lows in defiance of historical trading patterns for the month.

Reuters: – Muni weekly issuance in U.S. set to hit 4-month high. – Issuance of new debt in the $3.7 billion U.S. municipal bond market is set to hit its highest level in four months next week, reaching $8.4 billion, as investors and issuers remain undeterred by the volatility that has hit financial markets.

The Bond Buyer: – Unrated $1.6 billion deal for 3 WTC coming soon. – Six years after construction started, the developer of 3 World Trade Center is planning to bring a $1.63 billion long-term tax-exempt financing for the project to the market.

Bloomberg: – BlackRock sales in October rally signal its limits. – The municipal-bond market’s rally this year has confounded Wall Street expectations, culminating in the best October performance since 2001 and drawing the most cash in two years. BlackRock Inc. (BLK) has had enough.

Bloomberg: – California sells $350 million of quake bonds. – The California Earthquake Authority, the largest seismic insurer in the U.S., is selling $350 million in bonds to strengthen its ability to pay claims, after the state’s first death due to a quake in 11 years.

Muninet Guide: – How does your state’s economy rank? – The Economic Indicators Report is is not intended to determine which are the best or worst performing economies, but rather the direction in which the economies are heading. It provides an insightful view of national, regional, state, and even county trends.


Bond Market

CNBC: – Bogle vs. Pimco—who is right? – When the bond-fund heavyweight Pimco scuffles with passive investing guru John Bogle about the right approach to bond investing, it’s like watching a good prize-fight boxing match. Pull out the popcorn and let’s see who we think will be the winner.

Morningstar: – What great rotation? – The epic bond rally that began in the early 1980s seems about to end, as the Federal Reserve eyes raising interest rates. So investors keep hearing about a so-called Great Rotation out of bonds into stocks. Well, it’s not happening, due to lingering leeriness about equities after the horrendous market slide that the financial crisis created – memories that this month’s slide have reinforced.

AllianceBernstein: – What to think about in a bond market reboot. – U.S. interest rates are likely to head up gradually over the next several years, now that the long tailwind from a three-decade-long rate decline has subsided. With bonds still an important part of many portfolios, what should investors be thinking about?

Tradeweb: – Market snapshot: A volatile week for global government bonds. – Investor fears over continuing geopolitical tensions and the sustainability of economic recovery have been mounting up in the second half of 2014.


Treasury Bonds

Trustnet: – Beware “extremely expensive” bond market, warns Brookes. – The recent rally in government bonds following the sell-off in equities has left US treasuries and gilts “extremely expensive”, according to fund experts, who warn that investors are making a big mistake if they were to dip into sovereign debt at this level.

WSJ: – Goldman Sachs, J.P. Morgan lower views on year-end Treasury yields. – (Subscription) Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. cut their year-end interest-rate forecasts, becoming the latest Wall Street firms to bow to the reality of falling bond yields among dimming global-growth projections.


High Yield Bonds

Income Investing: – Why junk bonds are really small-cap stocks. – High-yield bonds are often seen as the bond market’s version of stocks, and analysts often expect both markets to move in tandem during times of volatility. But what’s the best equity index to look at when comparing stocks to junk bonds?

Income Investing: – Junk bonds now better value than bank loans – Citi. – Add Citi to the list of banks and asset managers who are finding fresh value in high-yield bonds after all the recent market gyrations. Citi this afternoon says it’s reversing its recent stance that had favored bank loans over high-yield bonds.

Barron’s: – Junk bonds back in Vogue. – (Subscription) Treasuries keep getting more expensive, but high-yield bonds are suddenly living up to their moniker again, as a sharp price drop has created some rare bond bargains.

Bloomberg: – PepsiCo helping stir corporate bond offerings to life. – PepsiCo Inc. (PEP) and Nova Chemicals Corp. are among borrowers stirring corporate bond sales to life after market turmoil reduced weekly debt offerings to the least since August.

FT: – Investors turn to junk ETFs amid sell-off. – Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings.

Income Investing: – Junk bonds won’t return to their peak prices – BofA. – Bank of America Merrill Lynch‘s high-yield strategy team says today that we’ve probable already seen low point for junk-bond yields this cycle (and the high point for prices) back in June, when the market’s average yield dropped to a record 4.85%.

Reuters: – Loomis Sayles bought junk bonds during sell-off last week: Fuss. – Dan Fuss, vice chairman and senior portfolio manager at Loomis Sayles, said he purchased some below investment-grade credits during last week’s sell-off at “reasonably priced levels,” bringing his portfolio cash levels down to 22 percent from 26 percent.

Bloomberg: – Lonely bond buyers feel deserted when junk-market rout heats up. – High-yield investors are more worried that no one will bid on their bonds than they are about the risk of companies defaulting.


Emerging Markets

WSJ: – Argentina to sell up to $1 billion dollar-linked bonds this month. – (Subscription) Argentina’s government said it would sell up to $1 billion in local U.S. dollar-linked bonds later this month as it continues to tap local institutional investors such as banks and insurers for financing.

Reuters: – Venezuela benchmark bond yield highest since financial crisis. – The yield on Venezuela’s benchmark global bond hit its highest level since the global financial crisis on Thursday, driven by a continuing slide in oil prices and concerns about the nation’s ability to pay.

ETF Trends: – EM bond ETFs face another Russia downgrade. – Despite another tumultuous year for emerging markets equities, investors have remained confident regarding sovereign debt issued by developing world governments.


Investment Strategy

Investing.com: – Here’s a smarter way of searching for yield. – In general, I am not in favor of reaching for yield as the practice can entail a high degree of risk that income oriented investors cannot tolerate. I do understand, however, the dilemma facing such investors who need a regular stream of income.

Money: – Why I won’t own bond funds in my retirement portfolio. – Owning a mix of stocks and bonds is supposed to help protect your portfolio from losses. But bonds aren’t the safe asset they once were.


Bond Funds

FT: – Investors head for relative safety of bond funds. – (Subscription) Amid concerns about the crisis in Ukraine and the rise of Islamic militants in Iraq and Syria, investors on both sides of the Atlantic headed for the relative safety of bond funds in the second quarter of this year.

ETF Trends: – Active ETF space gets more active. – The actively managed exchange traded fund space is dominated by a handful of players, but the industry could quickly expand if the Securities and Exchange Commission gives the greenlight for nontransparent ETF offerings.

PIMCO: – New Structure and shared responsibilities. – Pimco Group CIO Dan Ivascyn discuss the firm’s investment team structure and his leadership philosophy.

Zacks: – 5 Strong buy diversified bond mutual funds to outperform. – 5 top rated diversified bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future.


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