PIMCO Suffers More Woes and Today’s Other Top Stories

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When it rains it pours, and that’s certainly true of PIMCO right now. Fresh from the departure of long time Co Chief Executive, Mohamed El-Erian earlier this month. PIMCO has now suffered the embarrassment of having one of its key ratings downgraded by Morningstar.

Morningstar cited concerns about the recent high profile departure of El-Erian as well as reports of infighting between Bill Gross, the funds longtime leader and El-Erian, a man once tipped as Gross’s successor.

The Financial Times reports that, Morningstar, the powerful mutual fund research firm whose recommendations are widely followed by retail investors, have downgraded the ‘stewardship’ rating it carries for PIMCO from B to C. Morningstar also cut PIMCO’s ‘parent pillar score’ – which examines factors such as manager turnover, investment culture and fee levels – from positive to neutral.

Morningstar’s stewardship rating is a key metric used by investors to examine the manner in which funds are run and the degree to which shareholders can expect their interests to be protected from potential conflicting interests of the management company. An A grade is the highest award and F the lowest.

Morningstar stressed that the changes to PIMCO’s stewardship and parent pillar score do not automatically affect the ratings of PIMCO’s individual funds but that “it was logical to assume that Morningstar analysts would move quickly to reassess those ratings on a fund-by-fund basis”.

Morningstar added that it is preparing a follow-up paper for early April 2014 that will summarise its current opinions on Pimco’s individual funds.


Todays Other Top Stories

Municipal Bonds

New York Times: – Determining the markup on municipal bonds. – The price you pay for the bond, including the markup, has a direct impact on the return you’ll earn as the owner of the bond. While markups are common, it isn’t always clear how much they tend to be.

Muniland: – The winnowing of retiree healthcare costs. – Many state and local governments have promised to provide healthcare benefits for their retirees. Few governments have set aside funds to pay for these promises, leaving an enormous unfunded liability that will burden future municipal budgets. Every government is responsible to meet their promises.

MarketPulse: – Munis are now Belle of the ball. – The municipal-bond market seems to be pulling off one of the world’s oldest and most effective seduction ploys: playing hard to get. And that could be welcome news for some big banks.


Bond Market

LearnBonds: – Hiring data – Moderately encouraging. – Last month’s hiring data appear to indicate that the economy is at least chugging along. However, we have been wary of exogenous events, some we saw coming and some, which have come as surprises. Russia’s incursion into Crimea was an unforeseen exogenous event. We did not see it coming, few did. However, China’s problems were there for all to see. The problem was; few wanted to look.


Treasury Bonds

Bloomberg: – Treasuries hold two-day drop before Fed meets on taper, guidance. – Treasury 10-year notes held two days of declines before the Federal Reserve begins a meeting at which analysts forecast policy makers will decide to further scale back purchases of government bonds.

ETF Trends: – Investors look to TIPS ETFs to hedge against inflation. – With the U.S. economy humming along, inflation expectations are rising, and investors are turning back to exchange traded funds that track Treasuries tied to the cost-of-living increases.


Corporate Bonds

WSJ: – Verizon prices $8.2 billion in debt. – Verizon announced the pricing of $8.2 billion in debt that comes due between 2016 and 2018. The offer represents the telecommunications company’s largest U.S. debt sale since its $49 billion bond deal in September.

Donald van Deventer: – The Coca-Cola company: A bond market view. – Bond investors have bid up the bonds of the company, but the best estimates of default probabilities (where love is irrelevant) for the company are just average.

FT: – Hunger for long-term debt shows US growth uncertainty. – Will it be all pain and no gain for investors who have piled into long-term corporate debt recently?

Northern Trust: – Strong fundamentals, low interest rates combine to create an attractive environment for U.S. corporate bonds. – For fixed income investors, the extremely low interest rate environment of the past few years has left them searching for higher yields. As they did in 2013, Northern Trust Asset Management believes investors worldwide will look to invest in U.S. corporate bonds.


High Yield

Market Realist: – Why is the high yield bond market seeing so much fresh supply? – Weekly issuance can help gauge both the demand and supply of the high yield bond market. New bonds increase the supply available to investors in the secondary market, and demand indicates new issuance that’s preceded by investors’ interest. So strong weeks of issuance signify an overall bullish market. High yield issuance for last week was at its strongest so far in 2014.

Wall Street Playbook: – Retail investors can profit from high-yield debt offerings. – Can the average investor level the playing field by focusing more on the bond market?


Emerging Markets

FT: – EM central banks sell U.S. government bonds. – Central banks and hedge funds were large sellers of US Treasury debt at the start of the year, according to the latest official data released on Tuesday, as stress among emerging market countries intensified.

Reuters: – Foreign demand for U.S. Treasuries slides in January. – Demand for U.S. Treasury securities weakened in January, as foreign central banks and other official investors sold for a second straight month, data from the U.S. Treasury showed on Tuesday.


Investment Strategy

About.com: – The danger of shifting your longer-term allocation for the wrong reason. – Individual investors are generally regarded as being terrible at making decisions with their money, buying at the highs and selling at the lows. So what’s the solution?

DoctorRX: – Turning bullish on bonds. – Both as a portfolio diversifier and as an aggressive long strategy, investors and speculators may wish to consider the possibility that the amazing bull market in bonds may have a good deal more life left and thus may merit either a trading position (not necessarily after the recent run-up) or a core position for long-term investment.

Citywire: – Global credit: How fund pickers are playing the bond markets. – Credit is a very big market and we are still broadly positive but we have to be increasingly selective. We have looked at the high yield markets and also moved to a shorter duration. When it comes to investment grade bond markets like Europe we don’t think we are getting paid for the risks involved.


Bond Funds

WSJ: – PIMCO Total Return peers also suffered outflows. – If misery loves company, PIMCO Total Return Fund can find some solace in the money that’s been pulled out of some its competitors.

Focus on Funds: – ETFs: Silly and toxic, homework-requiring or brilliant? – Here’s a reason to sleep soundly if, like most investors, you choose to ignore new exchange-traded funds: One of the industry’s leading experts considers a quarter of them to be “toxic and silly.” Another half of launches require serious research to understand.

Biz Journals: – State program designed to improve access to bonds launches. – The state today began selling bonds under a new program designed to give individual investors better access to municipal debt. The program is known as MassDirect Notes, and it will offer bonds over the course of two weeks every month, rather than in a single day on an irregular schedule.

ETF Trends: – Fed’s March rate decision could determine if this week is a lion or a lamb for bonds. – The week ahead for economic numbers started today with March’s Empire Manufacturing which at 5.61 was lower than the expected 6.5. It still remains to be seen if any recent weakness in the economy has been due to the harsh winter and if the markets should have more confidence in the Fed’s view of underlying strength in the economy which led to the decision to continue taping its stimulus buying.

WSJ: – Options show more bullish bets on bond ETFs as rate fears ease. – With Ukraine in turmoil and China showing signs of a potential slowdown, the options market is showing a renewed bullishness for U.S. Treasury bonds.


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Simon G

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