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Benchmark U.S. Treasuries yields should drift higher towards year-end after a rally on Wednesday briefly pushed yield on the 10-year note below 2 percent for the first time in 16 months, according to Rick Rieder top bond officer at BlackRock Inc.
Safe-haven buying of U.S. government debt has surged since last week on fears about the global economy combined a lack of U.S. inflation.
“Technical market factors, not fundamentals, were at play here” during the bond market rally, Rieder, said in a statement on Wednesday, blaming the bond market rally on large players unwinding bets on rising Treasuries yields in the futures markets.
“The extremity of the move suggests that it is highly unlikely to have been caused by a wholesale reevaluation of fundamental economic conditions, despite some weaker data releases this morning,” he said.
The yield on the 10-year Treasury fell as low as 1.865 percent in early U.S. trading before ending the day at 2.129 percent, down 8 basis points from late Tuesday.
Rieder said fair value of 10-year Treasuries is roughly between 2.65 percent to 2.75 percent, a trading range not seen since April.
For the remainder of the year, the 10-year yield will likely “drift higher again, but their cap is probably lower for now,” he said, in the 2.50 percent to 2.60 percent area.
Todays Other Top Stories
Learn Bonds: – Bond yields drop even further. – Just when you think they couldn’t go any lower… bond yields drop even further. The same day, the yield on the 30-year US Treasury bond fell below 3.00 percent. This yield had not been this low since early May, 2013. It just seems as if investors are getting more and more pessimistic about economic growth.
Bloomberg: – School tech bonds helping Scarsdale lost on Yonkers. – Governor Andrew Cuomo wants to borrow $2 billion for classroom technology in what would be New York’s biggest school-bond issue since 1997. Yet education groups say they didn’t ask for it, and some districts say they’d rather add teachers or universal pre-kindergarten.
Standish: – Why municipal bonds can be an attractive investment for corporations. – Successful domestic companies, as defined by their profitability, share their success by paying federal and state income taxes. Tax aware corporations will attempt to minimize their tax liability, and will often invest in municipal bonds as the interest income on municipal bonds is exempt from federal (and potentially state) income taxes. Our discussion will include the potential use of tax-exempt and taxable bonds to attempt to maximize after-tax return within a corporate operating portfolio.
WSJ: – Bullard says Fed could delay planned end of bond-buying program. – The Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling U.S. inflation expectations, Federal Reserve Bank of St. Louis President James Bullard said Thursday.
Bloomberg: – Biggest pain trade gives 37% loss to bond bears getting it wrong. – What a dismal time for bond traders who were optimistic about growth.
Brad Kenagy: – REITs and muni bonds: Top performers in recent sell-off. – (Registration) I screened for stocks and ETFs that closed up each of previous five trading days. I found that 6 stocks and 5 ETFs met my screen criteria, and looked for any investment themes that were present. What I found was that during the recent market sell off, REITs and municipal bonds were the top performers.
FT: – After QE: Taking off the stabilisers. – (Subscription) Markets are braced for increased volatility as central banks signal an end to unlimited liquidity.
FT: – Banks blame bond volatility on tighter regulation. – (Subscription) Wall Street’s biggest banks have placed much of the blame for violent swings in US government bond prices over the past 24 hours on new bank safety regulations that they say have reduced market liquidity.
FT: – ‘Time to wake up and smell the coffee’ in markets. – (Subscription) How are market participants reacting to the turmoil in the global bond and equity markets?
FT Alphaville: – The “I told you so” trade in credit is to wait and see. – (Subscription) Who doesn’t like to start the day with a nice hot cup of vindication? There will be plenty of time to recognise those who have been warning about a lack of real liquidity and the chance of real volatility later. For now the question is what to do?
FT: – Treasury bonds’ “flash crash”. – (Subscription) John Authers reports at the end of a Wall Street trading that saw 10-year treasury yields drop 35 basis points in minutes, and then retrace most of that fall in a matter of hours. What does it mean for equities, and for the world economy?
WSJ: – Corporate cash continues to flood into corporate debt. – (Subscription) Companies continued to put an ever-higher proportion of their cash piles into corporate debt in September, sending the asset category to another record high in at least six years of record keeping.
High Yield Bonds
Bloomberg: – Pimco’s Mark Kiesel says buy high-yield debt, loans. – Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co., says riskier debt is attractive after a selloff pushed yields to the highest level in more than a year.
Reuters: – Vulnerable high yield bonds fall in price prior to spike in defaults. – Many market prognosticators are calling for significant spikes in the US corporate high yield default rate, starting in 2016 and likely sustaining to 2018-2020. Does that mean that we should try to time being short closer to 2016?
Andrew Sachs: – What the high yield credit spread means for financial markets. – The high yield credit spread continues to widen as investors sell off riskier assets for safer Treasury bonds. Weak U.S. economic data in recent weeks has contributed to the selling pressure. As the economy continues to report mixed economic data, the spread should remain wide, signaling investor discontent, as well as weighing on riskier assets such as equities.
Moody’s: – Moody’s: North American high-yield bond covenant quality plummets to new low in September. – North American high-yield bond covenant quality declined precipitously in September, Moody’s Investors Service says in its latest report on its Covenant Quality Index, or CQI. The average covenant quality score for bonds issued last month deteriorated to a record low of 4.43, from 3.81 in August.
Camradata: – Emerging markets debt investors breathe a sigh of relief as election cycle ends. – Major elections and political activity will pave the way for sought-after reforms, according to Lazard Asset Management. The global investment manager, which has over £107.6 billion invested for clients, says that despite poor performance for local assets due to a sell-off in emerging markets currencies, a correction in emerging markets debt should contribute to an attractive 2015 for emerging markets debt investors.
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, driven by a continuing slide in oil prices and concerns about the nation’s ability to pay.
Artemis: – Record year of $9Bn of ILS and catastrophe bonds still possible. – Despite a slow third-quarter Willis Capital Markets & Advisory still expects that 2014 issuance of new catastrophe bonds and insurance-linked securities (ILS) can break the previous record set in 2007, with as much as $9 billion possible.
Businessweek: – Wall Street’s buy signals ignored as junk loses. – Wall Street’s declaration in recent weeks that it was all-clear to dive back into junk bonds is proving premature as new concerns over the health of the global economy collide with reports showing investors’ protections in the debt are the weakest on record.
Philly.com: – Vanguard assets up $1 trillion, fees up $1 billion/year, since 2011. – Vanguard now manages more than $2.7 billion in the U.S., which is 18% of the mutual fund business, according to data founder John C. Bogle sent Vanguard managers and posted on his Web site for the company’s 40th birthday last month. Worldwide assets top $3 trillion. Vanguard has more than doubled since 2009, which was a record year for Vanguard despite the stock market collapse, as investors snapped up its bond funds; the group has added more than $1 trillion more just since 2011.
ETF Trends: – Skittish investors turn to safe-haven government bonds, ETFs. – Government bond exchange traded funds jumped Wednesday as benchmark 10-year yields on U.S. Treasuries and municipal debt securities dipped below 2% for the first time in over a year.
Bloomberg: – ETFs built for stormy weather show up on the radar. – With financial markets at risk of losing their monthly dose of bond-buying from the Federal Reserve soon, the market’s recent gyrations could signal far more volatility to come. And if it does, a handful of actively managed exchange-traded funds are standing by to benefit. These niche ETFs were created to provide shelter, or generate profits, from market downturns, a strategy that hasn’t been in high demand during a long bull market.
ETF Trends: – This ETF does PIMCO proud. – Although the dust is starting to settle from Bill Gross’ departure from PIMCO, the bond manager he co-founded, there is still ample chatter about outflows from the company’s mutual funds and exchange traded funds. However, not all PIMCO ETFs are losing assets simply because one man departed the firm. In fact, at least one of the firm’s ETFs finds itself very much as the right place at the right time.
Yesterday’s spike lower in 10yr to 1.86 reeks of very large short-cover, forced trade.
— AnthonyValeri (@Anthony_Valeri) October 16, 2014
US Treasury prices turn negative, 10 year yield up to 2.13 pct
— Chris Adams (@chrisadamsmkts) October 16, 2014
I was at a conference recently with some of the biggest investment funds in the country. No one has a clue what to do about bonds…
— Ben Carlson (@awealthofcs) October 16, 2014