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Back in January, amid all the uncertainty surrounding when the Federal Reserve would finally begin hiking its key lending rate. — Two big-money investors Bill Gross’s PIMCO and Larry Fink’s BlackRock were betting against each other.
While PIMCO was buying up intermediate-term Treasurys like 5-year notes, BlackRock shied away from intermediate-term maturities and bought up longer securities like 30-year bonds and super-short maturities like 1-year notes, in what’s known as a barbell strategy.
Since then benchmark Treasury yields, generally thought at the beginning of the year to move higher, decided to fall instead. The 10-year Treasury note yielded an astounding 2.41% on Thursday, its lowest in 11 months.
This led PIMCO to tweak its secular outlook on the economy earlier this month to represent the sentiment that the Fed would keep its peak funds rate low during this economic cycle — what it termed the “new neutral.”
But despite these shifts in bond market sentiment, these two different sides of the yield curve debate remain at odds. Bloomberg’s Charles Stein reports that while PIMCO likes 5-year notes, BlackRock, Goldman Sachs Asset Management and J.P. Morgan Asset Management are all turning up their noses to that maturity, reckoning that such securities will get hammered when the Fed lifts rates.
The whole argument is centered around one question: How high will the Fed eventually raise its key rates? Depending on where rates land, the intermediate sector of the yield curve could outperform, or it could get clobbered. As Bloomberg reports, Gross sees a peak policy rate of 2%, while the other three big money managers see that rate rising to somewhere between 3% and 4%.
If Gross is right and the rate remains closer to 2%, the bond king could emerge triumphant and end his fund’s longest streak of redemptions. If he’s wrong, he could underperform peers for a third year in four.
Todays Other Top Stories
WSJ: – Mom and pop investors return to municipal bonds. – Municipal-bond prices have come roaring back, reversing last year’s rout despite enduring financial challenges facing U.S. cities and states.
Bloomberg: – Muni-Bond buyers may overpay, SEC’s Gallagher says. – Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, according to a member of the U.S. Securities and Exchange Commission.
Bloomberg: – Muni market starved for bonds gets most supply in three months. – Localities in the $3.7 trillion municipal market are planning the largest wave of debt sales in almost three months, bucking a trend of diminished borrowing that’s pushed yields to the lowest since June.
Barron’s: – Muni momentum: Funds net fourth straight week of inflows. – Municipal bond mutual funds and exchange-traded funds posted a fourth consecutive robust weekly net inflow, taking in $634 million in the week ended Wednesday, per Lipper data, following net inflows of $664 million, $616 million and $943 million in the previous three weeks. The four-week moving average climbed to $714 million from $549 million a week ago.
Bloomberg: – Europe’s bond traders face overhaul seen stricter than U.S. – The biggest transformation in the history of Europe’s $11.4 trillion corporate bond market has kicked off with dealers and investors asked to adopt changes even stricter than those that prompted upheaval on Wall Street more than a decade ago.
Bloomberg: – Bonds rallying most since 2009 mask apprehension. – The biggest corporate bond-market returns since 2009 mask a growing sense of unease.
Pragmatic Capitalism: – “What’s the bond market telling us?” – This seems to be a very common question these days. As yields continue to fall and stocks continue to rise many people assume that there’s some necessary disconnect in the way bond markets and equity markets are reacting. So you often see people asking a variation of this question which is “does the bond market know something that the stock market doesn’t?” I don’t think this implicit correlation is a very good way of viewing things. And here’s why.
A Wealth of Common Sense: – What does the bursting of a bond “bubble” look like? – A lot has been made about the potential for a bond bubble with interest rates near historic lows and not much room to fall any further. Even though rates are down this year, investors have been worried for some time about what happens when rates do eventually rise.
Businessweek: – You’re all whales in bond market now with trading volume slump. – It’s getting easier for a smaller group of bulls in the U.S. Treasury market to create angst for the bears.
Business Recorder: – The lost charm of treasury bills. – Single-digit rates are not exciting enough anymore. Even with the rate cut view for the longer run maintained by the market, there were no takers for 12-month treasury bills in the latest MTB auction held on May 28, 2014. A look at the latest auction result makes the previous auction look like one from another world and another time.
David Fabian: – Don’t confuse rising TIPS prices with inflation. – Many investors confuse the price action of TIPS with inflationary effects. TIPS respond to changes in interest rates just like regular treasury bonds, but their coupon can adjust with changes in CPI. Right now, we aren’t seeing adverse inflationary effects, which is why TIP may not be the most suitable fixed-income investment.
ETF Trends: – The 10-year Treasury yield hits levels not seen since last june. – The last time the yield of the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index was in the neighborhood of 2.4% was back in June 2013. The days of a 1% handle on rates are behind us, but the current lower rates harken back before this year. The beginning of 2014 saw yields as high as 3%. Back then, the market worried over issues such as the start and speed of Fed tapering, discussions of the timing of a rate increase, and an improving jobless claims number.
LearnBonds: – Can you count on a 6.6% frontier communications yield? – Frontier Communications (NYSE:FTR), now the largest rural telecom company in the U.S., has long been a favorite of mine, although it tested my devotion a few years ago when it cut its dividend twice in six months, from $1.00 a year to 40 cents. Since then, though, the dividend has held steady, for a handsome yield of 6.6%. The question is, can you count on it? I think you can. Here’s why.
High Yield Bonds
IFR: – High-yield lite fuels fears. – Junk-bond investors are passing up traditional protections in their race to buy new debt, and some participants worry the diminished safeguards are a sign of an overheated market.
Fox Business: – Be careful with high-yield debt. – Owners of junk bonds need to be careful as to what they own and be sure in their timeframe for ownership.
What Investment: – The best way to invest in emerging market bonds. – Investing in local-currency emerging market bonds won’t necessarily bring a quick or easy profit, but may be worth it for long-term, patient investors, argue Gerardo Rodriguez, managing director of BlackRock’s emerging market team and Sergio Trigo Paz, head of emerging market debt at BlackRock.
FT: – ECB signals fire up Eastern European bond rally. – As the European Central Bank (ECB) teases investors with hints of monetary stimulus measures, expectations of a rate cut are already helping boost appetite for emerging market debt on the continent.
FT: – USAA sells first meteor strike ‘cat bonds’. – USAA, the US insurer, has sold $130m of catastrophe bonds that allow investors to collect yields of 15 per cent or more by betting on the chances of a meteor strike or volcanic eruption.
Insurance Journal: – Florida benefits as yield-thirsty investors line up for hurricane bonds. – In 2008, Florida’s government-run property insurer paid Warren Buffett $224 million to agree to buy its debt if a major storm struck. Six hurricane-free years later, the state is turning investors away.
Money Marketing: – Jim Leaviss: Finding value in global bonds. – Value may still be found in global bond markets as interest rates may remain lower for longer and inflation is not a near-term concern.
Citywire: – Financial bonds are ‘safest bet’ in the market, says ACPI bond star. – Citywire AA-rated manager Steven O’Hanlon has financial bonds to nearly one-quarter of his total exposure in order to capitalise on deleveraging in the sector.
USA News: – How to build an all-weather mutual fund portfolio. – The first and most important quality of a portfolio is that it be diversified. A portfolio should contain stock mutual funds as well as mutual funds that contain bonds. How much of each you should include depends on two things: time horizon and risk tolerance.
Think Advisor: – How behavioral finance can help bond investors. – Lessons learned from the equity market can be applied to bonds as well.
ETF.com: – Daily ETF watch: 5 ETFs launch. – Five ETFs are launching today, including four corporate bond funds from iShares and one multi-asset class “alternative” strategy from PowerShares aimed at better minimizing the effects of market volatility. All five funds are tools that can help investors better manage the expected rise in yields.
ETF.com: – Emerging markets, Treasury ETFs in vogue. – ETF investors piled into emerging market equities in May, looking for outsized returns in the region amid a prevailing perception that growth in developed markets—particularly in the U.S.—is slowing down.
Gross: McCulley movin’ in and makin’ a difference already. Strong voice/ strong intellect…and bowls 200+ !
— PIMCO (@PIMCO) May 30, 2014
— Cate Long (@cate_long) May 30, 2014
“Cities and states aren’t borrowing enough to meet the demand from investors,” said Vikram Rai, a fixed-income strategist at Citigroup Inc.
— Kristi Culpepper (@munilass) May 30, 2014