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This Week’s Top Bond Market Stories – August 14th Edition

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Learn Bonds: – How to estimate the real rate of interest and why it matters. – There was a question to my last post concerning the relationship between the real rate of interest and the rate of growth of the economy. The question: why should these two rates be equal? This is a good question that I was going to address sometime …so let’s do it this week.

Learn Bonds: – Does interest rate renormalization = corporate default renormalization? – Interest rate renormalization probably means corporate default renormalization. That leaves debt (both loans and bonds) issued by junk-rated companies at an increased risk of default.

Learn Bonds: – Evaluating credit market risk vs. return. – In the bond world, the risk of not getting your money back is called credit risk (or sometimes default risk). Credit risk and term risk (the length of your loan) are the two most important sources of risk when investing in bonds.

Learn Bonds: – This 6% yielding security is worth a look. – If you are looking to build a diversified income stream that includes exposure to the utilities sector, Duke Energy’s DUKH bond is worth considering.

Learn Bonds: – 6 Things to like about Treasuries. – In the world of investing, Treasuries are one of the most disrespected of all financial assets.  I am frequently amazed by the plethora of financial pundits who will openly admit they can’t think of any reasons why investors should own Treasuries.  Besides the important role that Treasuries play as collateral in the world’s financial system, they have other redeeming qualities as well.  In no particular order, here are six things to like about Treasuries.

Learn Bonds: – Verizon bonds plunge following Vodafone deal. – Last week, Verizon Communications announced it would be acquiring the 45% stake that Vodafone holds in Verizon Wireless. The $130 billion deal’s consideration structure is mostly cash and stock, and it will increase Verizon’s debt by roughly $67 billion. No, that is not a typo. Verizon’s debt will increase by approximately $67 billion as a result of the deal, more than doubling the company’s debt load.

Bernardi Securities: – 2013 Municipal bond scare: Exits & opportunities. – Bernardi Securities are hosting a webinar next Wednesday the 18th featuring Matt Fabian from MMA (Municipal Market Advisors), one of the leading municipal market analysts. Topics covered include Detroit, “The Great Rotation”, laddered portfolios vs. funds, and recent market movements.

PIMCO: – What’s happening to bonds and why. – To say that bonds are under pressure would be an understatement. Over the last few months, sentiment about fixed income has flipped dramatically: from a favored investment destination that is deemed to benefit from exceptional support from central banks, to an asset class experiencing large outflows, negative returns and reduced standing as an anchor of a well-diversified asset allocation. Understanding well what created this change is critical to how investors may think about the future, including the role of fixed income as part of prudent investment portfolios that help generate returns and mitigate risk.

Morningstar: – Where can you still find value in the bond market? – Corporate bonds are overvalued and junk bonds look risky – but buy a strategic bond fund and the manager will do the blend for you.

WSJ: – A toxic subprime mortgage bond’s legacy lives on. – Made entirely out of loans from Countrywide Financial Corp., the bond was so battered by delinquencies in 2009 it appeared that nearly all of the thousands of mortgages inside the bond could default. One might think that today, such a relic of misbegotten lending would be as dead as orbiting space junk. Instead, CWABS 2006-7 is alive and well, a sought-after asset that has made big profits for savvy investors.

MoneyBeat: – Back to good old days for bond risk premiums. well, mostly. – In the old days investors would hold debt happily as long as its yield promised them reasonable protection from inflation and short-term rate expectations, along with a little premium on top for lending their cash to governments long term. That premium went by the board across the world, collapsing to levels not seen for decades between 2007 and 2011 as investors sought safety at more or less any price. Well, now, in one of those signs of normalization we all look for and love, risk premia are creeping back to normality.

Telegraph: – Bond investors face annual losses for only third time in 33 years. – Jeffrey Rosenberg, who is the chief investment strategist for fixed income at BlackRock, which manages bond investments worth $1.2 trillion or £750bn, said bond investors had lost 3.65pc so far this year and that “avoiding an annual loss will require a major shift lower in interest rates, something we do not expect”.

Donald Van Deventer: – Will the U.S. default? An introduction to sovereign default risk. –  This article explains the differences between modeling sovereign default and the default risk of more traditional retail and corporate counterparties.

FT: – U.S. Treasury keeps eye on bond market liquidity. – U.S. Treasury and Federal Reserve officials are monitoring the liquidity of bond markets after warnings from banks and institutional investors that the system has been weakened dangerously by new regulations.

What Investment: – U.S. bonds heading for third down year since 1980. – Investment-grade bonds in the US are likely to finish 2013 having delivered a negative total return, according to BlackRock’s chief investment strategist for fixed income, Jeffrey Rosenberg.

Gary Gordon: – Should you still desire bond ETFs for your portfolio? – Bond ETFs can reduce overall portfolio volatility. So while it may seem that the two-year stock rally is the only thing worthy of notice, and the two-year 0% return for most bond holdings are unsavory, the next stock market correction of 10%-20% would change those figures in a heartbeat.

SL Advisors: – The problem with “rising rate” strategies. – In recent weeks I’ve heard quite a few people comment that they’re looking for “rising rate strategies”. It’s a seductive concept; interest rates are almost assuredly headed higher. The debate about tapering rages on, and clearly the bull market in bonds is over. Serial Quantitative Easing will transform to the Fed’s exit strategy from its $3.5 trillion balance sheet. Unfortunately, it’s not that simple.

WSJ: – A return to emerging-market debt. – Russia and South Africa issued bonds in the biggest sale of emerging-market government debt this year, a sign that many investors remain interested in developing economies even after months of turmoil.

MoneyWatch: – How safe is PIMCO’s giant bond fund? – When it comes to bonds, risk and return are linked. The higher PIMCO return comes from taking on more credit risk. Although the PIMCO fund still looks like a good investment, never forget that the fixed income part of your portfolio needs to be your shock absorber when things get bad with stocks. Though both the PIMCO and Vanguard funds served that role well in 2008, it’s less clear whether PIMCO would come out as well in a repeat scenario.

Indexuniverse: – MINT Tops BOND As Biggest Active ETF. – The PIMCO Total Return ETF (BOND), with current assets of $4.03 billion, was surpassed on Sept. 3 by a fund in its own family, namely the PIMCO Enhanced Maturity Strategy Fund (MINT), a money-market proxy that currently has $4.15 billion in assets under management, according to data compiled by IndexUniverse.

ChartWatchers: – Bond yield very overbought. – We have been observing how, in spite of the Fed’s efforts, bond yields have been persistently rising, but now they have become very overbought.


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