Muni Drought Boosts Prices and Today’s Other Top Stories

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U.S. cities and states have cut back on borrowing this year as they rein in spending and tap other sources of funding for infrastructure projects.

The FT reports that new issuances have fallen 6% (subscription) so far this year. The resulting drought has pushed up muni bond prices and increased total returns for the asset class. In fact, muni bonds, whose attraction to investors is their tax-free status, have been one of the best performing assets.

So far this year, total returns have averaged 8.1%, according to Barclays indices. That compares with a total return of 4% for U.S. Treasuries and 7% for investment grade corporate debt.

The strong performance in munis comes in contrast to last year, which was the worst year for the $4tn market in almost two decades, largely due to Detroit filling the biggest municipal bankruptcy case in U.S. history.


Todays Other Top Stories

Learn Bonds

Learn Bonds: – Concerns about rising rates – The credit risk factor. – Investors are concerned with what is going to happen with yields when the Federal Reserve allows interest rates to begin to climb. The measures discussed in this post provide some idea of the direction the markets are moving and can be used to help interpret that movement.


Municipal Bonds

Governing: – S&P defends higher municipal credit ratings. – Over the last year, the credit agency upgraded 41 percent of local governments’ ratings, drawing skepticism from some.

Reuters: – Puerto Rico issues $350 mln in short-term notes -filing. – Puerto Rico’s Government Development Bank has issued nearly $350 million in short-term financing, according to a filling on the Electronic Municipal Market Access (EMMA) website on Thursday.

Bloomberg: – Muni yields plunge to 16-month low on strongest demand since may. – The $3.7 trillion municipal market is rallying for the fourth straight week, pushing yields to the lowest since May 2013 amid the strongest demand in five months.


Bond Market

Bloomberg: – Bond rally that wasn’t supposed to be delivers surprises. – After suffering their first losing month this year in September, fixed-income securities of all types worldwide are back on track in October to deliver their biggest annual returns since 2002 based on Bank of America Merrill Lynch indexes. Yields fell to an average 1.62 percent yesterday, down from 2.09 percent at the end of 2013 and the lowest in 17 months.

ValueWalk: – Slowing market momentum hurts bonds. – The third quarter of 2014 may serve as a blueprint for what investors can expect over the fourth quarter. Bond performance slowed markedly after a strong first half of 2014, with the broad Barclays Aggregate Bond Index returning a scant 0.2% for the third quarter. Year-to-date bond performance is still firmly positive but has not materially improved since May 2014, and the three-month rolling return has decelerated reflecting the slower pace of returns.


Treasury Bonds

Bloomberg: – U.S. two-year notes poised for biggest weekly gain since 2011. – Treasuries gained, with two-year yields set for the biggest weekly drop in more than three years, as investors pared expectations for interest-rate increases after the Federal Reserve highlighted risks to the U.S. economy.

WSJ: – U.S. government bonds gain as global stocks sell off. –  (Subscription) U.S. Treasury prices were higher on Friday as selling pressure hit global stock markets, setting up the 10-year yield for its longest streak of weekly declines since January.


High Yield Bonds

WSJ: – Junk bond funds attract $1.3 billion in latest week. –  (Subscription) Investors plowed $1.3 billion into high-yield bond funds in the week ended Wednesday, fund tracker Lipper said, the latest sign of investors’ search for income amid paltry interest rates around the world.

Bloomberg: – Fortress said to seek $4 billion for distressed credit. – Fortress Investment Group LLC (FIG), the first publicly traded hedge-fund and private-equity manager in the U.S., is seeking about $4.3 billion to buy distressed credit around the world as investment firms prepare for markets to sour, according to people familiar with the matter.

CNBC: – Why the strong dollar may sink junk bonds. – A simmering mix of a strong U.S. dollar and weak commodity prices may be brewing up trouble for junk bond exchange-traded funds (ETFs) with a hefty weighting in materials companies.


Emerging Markets

Reuters: – Growth worries slam stocks, oil, emerging markets. –  An index of global equities fell to a seven-month low and oil hit a two-year low on Friday, continuing a string of weakness built on worries about weak worldwide economic growth.


Investment Strategy

WSJ: – Pimco total return cut U.S. government-related holdings in September. –  (Subscription) Pimco’s Total Return Fund, the world’s largest bond fund, cut U.S. government-related debt holdings in September amid an abrupt departure of the fund’s famed manager, Bill Gross.

ValueWalk: – Investing for tax-efficient portfolio income. – With tax-exempt income from US municipal bond portfolios still near historic lows, investors spending from their portfolios can no longer get the income they need by simply increasing their allocation to high-quality, intermediate-duration bonds. As a result, many investors today are chasing yield into dangerous territory.

Zacks: – Prepare for rising rates with floating rate bond ETFs. – Most analysts had predicted that rates would go up this year as the Fed gradually winds down its massive asset purchase program. But interest rates actually declined and as a result, bonds returned to profits after making losses last year.


Bond Funds

Businessweek: – MFS fund top performer after ignoring forecasts. – Three decades into the bull market for bonds, few forecasters predicted that yields would continue to fall this year. Peter Kotsopoulos did.

Income Investing: – Bonds are in; Equity funds are out. – According to data from Citigroup, fixed-income funds enjoyed their record-high inflows during the week ended Oct. 8 with $15.8 billion entering the funds, while $12.9 billion exited equity funds.

Financial Lexicon: – HYLD – A high-yield bond ETF with a twist. – Yes. This “high-yield bond ETF” holds equities; quite a few, I might add.

Reuters: – U.S.-based taxable bond funds attract record $12.7 bln inflows. – Investors in U.S.-based funds poured a record $12.7 billion in net new cash into taxable bond funds in the week ended Oct. 8 while committing $9.5 billion to low-risk money market funds, data from Thomson Reuters’ Lipper service showed on Thursday.

Trustnet: – Why your bond fund will probably lose you money over the rest of 2014. – The end of QE in the US will cause a spike in volatility in the bond market over the coming few months, according AXA IM’s Nicolas Trindade, who warns that prices of most fixed income assets are likely to fall as a result.

ETF.com: – BOND’s lost assets go to ETF mainstays. – The PIMCO Total Return ETF, managed until recently by Bill Gross, has lost money on virtually every day since his Sept. 26 departure, totaling about $880 million, or about 25 percent of its assets. Worse yet, the ETF Gross ran has lost much of those assets to the very competing funds he belittled during the early glory days of BOND in 2012.


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