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Bond investors are worried, in 3½ months the 10-year yield has risen from 1.6% to over 2.9%. The reason, the Fed is threatening to pull back (taper) the amount of bond purchases it makes as part of its monetary stimulus program. The result will be higher yields.
As most investors know, when yields rise bond prices fall. This has led many to speculate that bonds could suffer another 1994 crash, when the U.S. 30-year long bond’s yield jumped more than 150 basis points to 7.75%. The primary trigger being, the Fed raising interest rates as it started to tighten policy following recovery from the 1991 recession.
But PIMCO’s Tony Crescenzi says investor don’t need to worry, 2013 is not 1994 all over again. Crescenzi appearing on CNBC says.
“The current bearishness in the bond market has been overdone, yields will move lower from here. By the end of the year, I see rates falling back to the low to mid 2s on the 10-year.”
This is in stark contrast to that other bond guru Jeff Gundlach, who sees rates on the 10 year Treasury climbing as high as 3.10% by year end.
This is looking like a standoff between two bond heavyweights, the current bond king against the great pretender. I guess we’ll have to wait until the year end for the winner of round one. Place your bets now!
Todays Other Top Stories
FT: – Five tips for bond investors. – Bond investors have been hit by increased volatility in the sector since May when the US Federal Reserve announced plans to reduce its bond purchases. Since then investment grade bonds have been overshadowed by interest rate movements, currency fluctuations and the eroding effect of inflation.
Learn Bonds: Would I rather buy a home or own $50,000 of bonds? – Marc Prosser looks at the value of owning your own home as an investment and whether the housing market recovery be derailed by rising interest rates?
Trustnet: – Making sense of the bond bubble: A beginner’s guide. – FE Trustnet looks at the reasons why fixed income is in such a state of flux at the moment and what investors can do to protect themselves from further strife.
The Street: – High yield bonds could be infected by emerging market miseries. – Junk bond funds have been one of the few fixed income instruments to remain in the black so far this year, but those meager gains may be at risk. Continued defaults by emerging market (EM) issuers may impact the U.S. high yield market, according to Fitch Ratings.
Market Realist: – Corporate bonds wrap up shy week ahead of FOMC. – The investment grade bond market slowed down due to the release of the FOMC (Federal Open Market Committee) meeting minutes, which were bound to cause increased volatility in rates and investor appetite. Given this development, not many issuers were expected to come to market last week. However, volumes and flows were even lower than expected.
USA Today: – Will Detroit’s financial woes hurt muni bonds? – Matt Krantz answers a reader’s question about the state of the muni bond market after Detroit’s bankruptcy.
Zacks: – 5 Highest yielding Zacks #1 Ranked high yield bond mutual funds. – Here are the top 5 highest yielding Zacks #1 ranked high yield mutual funds. Each has earned a Zacks #1 Rank as we expect these mutual funds to outperform their peers in the future.
Governing: – Turmoil and trouble in the muni bond market. – A veteran issuer gives his perspective on the mounting woes over muni bonds.
Bloomberg: – Risk flipped as CCCs beat AAAs most since 2009. – Risk is being turned on its head in the corporate-bond market as debt deemed closest to default beats returns on the highest-rated debentures by the most in four years.
Financial News: – September worries drive bond market. – Bond issuers have reopened the euro market as concerns mount about issuing conditions in September.
IFA: – Equity fund sales power ahead as bonds suffer. – Improving investor confidence coupled with a flight from bonds helped equity fund sales power ahead to £1.4bn over July, the highest since December 2010, according to the Investment Management Association.
Citywire: – How to play the great bond-equity correlation unwind. – The biggest challenge facing asset allocators is how to play the breakdown in the two-year correlation between equity and bond markets, as investors grapple with the reversal of loose monetary policies.
Morningstar: – ISA investors favour equities over bonds. – Last month, investors put the largest amount of cash into funds since April 2011, with equity funds proving most popular across the board.
Institutional Investor: – Investor interest in catastrophe bonds keeps growing. – Mounting natural disaster and a are helping swell the catastrophe bond market.
Amherst: w/ rising rates Fed needs to cut purchases by 40% in order to maintain the 56% share of issuance that they accounted for in 1H13
— David Schawel (@DavidSchawel) August 30, 2013