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This Week’s Top Bond Market Stories – January 10th Edition

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Learn Bonds: – Top 5 concerns for investors in 2015. – Bond market doomsayers arguments are not without merit, but that doesn’t mean their predictions will come true. So here are the top five concerns that they think investors are facing in 2015, and my thoughts on what to do about those concerns.

Learn Bonds: – Making sense of falling oil prices and ECB QE. – If the goal of QE is to lower interest rates/borrowing costs to stimulate the economy, we believe we can safely say that ECB QE should be largely ineffective. All this will probably do is maintain the current status quo in Europe.

Learn Bonds: – The top three reasons to own bonds. – For those that have been riding the stock wave higher the past six years, it may be easy to opine that there are no good reasons to own bonds. However when everyone becomes fond of a security or asset class, from a contrarian viewpoint, it oftentimes signals a topping out point. Ergo, it may be better to sell or minimally stop buying that asset when everyone else falls in love with it.

Learn Bonds: – Investing in 2015 the knowns and the unknowns. – If risk averse money has begun to flow into the United States once again one might expect that the yield on TIPS will again dip. How far yields on these securities fall is anyone’s guess.

Learn Bonds: – Understanding bond risk – Part 1. – Many investors think of bonds as “safe”. That’s not really a good idea. Bonds are “safer” compared to some other investments, but not as safe as others. In a period of unprecedented market changes, where the bond market has been manipulated by the Federal Reserve’s quantitative easing program, understanding bond risk is very important.  In this short series of articles I will cover the five types of risk inherent in bonds.

To see a list of high yielding CDs go here.

 

Municipal Bonds

Bernardi Securities: – Illinois Public Pension Compendium – Part Three: Components of Change in the UAAL. – In part three of our Illinois Pension Series, Components of Change in the UAAL, we will elaborate on the relationship between assumed versus actual investment returns, touch upon the performance of the State of Illinois’ pension bonds, and compare the condition of the State of Illinois’ pension system relative to five other states.

Bloomberg: – Puerto Rico may allow higher yields on bond sale to lure buyers. – Puerto Rico lawmakers plan to alter a bill so the Government Development Bank can offer higher interest rates on a $2.9 billion petroleum-tax-backed bond sale to increase demand for the debt.

Barron’s: – Muni Bonds: Calm ahead for 2015? – At times over the past few years, municipal bonds seemed to stray from their traditional role as staid income generators and morph into momentum investments, with performance driven by herds of investors alternately piling into munis or abandoning them, based on a variety of largely external forces.

ETF Daily News: – Is 2015 the year for municipal bond ETFs? – The U.S. muni bonds market had a great 2014 with its returns just below the S&P 500 and the Dow Jones Industrial Average. These two blue chip indices advanced a respective 15.3% and 11.5%. With the  S&P 500  also crossing the 2,000 mark, muni bonds turned out to be the third best performing category gaining 8.7% (per Wall Street), its three-year best.

Bloomberg: – Mercedes-Benz USA seeks bonds for new Georgia home. – Mercedes-Benz USA is applying to borrow $93 million through a sale of municipal debt to build its new Atlanta-area headquarters, part of a package of incentives the carmaker may get for leaving New Jersey.

 

Education

BlackRock: – Yield curve basics. – BlackRock’s Matt Tucker visits a San Francisco landmark to give Blog readers a lesson on the yield curve.

 

Bond Market

Barron’s: – Jeffrey Gundlach’s surprising forecast. – It has been a magnificent year for both the stock and bond markets, even with the slight wobble in equity-market results in the last two trading sessions of 2014. But with the drop of the ball on the Year of the Horse, it’s time to look ahead to 2015.

Barron’s: – Strong dollar trend will boost bonds, small stocks. – The euro may be headed for a round trip. Since its birth in 1999 at a rate of 1.1685 per U.S. dollar, the euro spent its formative years trading at lower prices. Then since 2003, with a small exception, it spent the rest of its life at higher prices. On several occasions it has been 30% or higher.

Business Insider: – If there’s a bubble forming anywhere, it’s in the bond market. – For Gluskin Sheff’s David Rosenberg, the demand for bonds that’s causing their prices to rally may be the beginning of a bubble. Bond yields fall when prices rise.

WSJ: – Fed bond purchases had larger overseas effects than rates, IMF says. – The Federal Reserve‘s bond-buying programs have had a much larger impact on capital flows in and out of emerging markets than conventional interest-rate moves in the past, according to a new working paper from the International Monetary Fund.

ETF Trends: – How can the bond bull keep going? – In our Weekly Market Update we have made an effort to track the deflationary story being told in the global fixed income markets, specifically sovereign yields have continued to trade lower defying what most investors thought was possible; Swiss 10 year debt recently yielded 25 basis points. A while back I quoted a Seth Klarman Tweet about German debt trading at multi-century low yields.

 

Treasury Bonds

Reuters: – Long bond yields hit multiyear lows on safety buying. – U.S. Treasuries prices gained on Monday, led by a sharp rise in the 30-year bond, whose yield dipped to a multiyear low on widening anxieties about Europe’s economy and Greece possibly quitting the euro zone.

Bloomberg: – Treasuries drop ends seven-day gain before Fed minutes. – Treasuries fell, halting a seven-day rally that carried yields to almost record lows, on speculation Federal Reserve minutes of its December meeting will show a central bank intent on raising rates this year.

Bloomberg: – Bonds look ‘dangerous’ at 300-year high. – The 40-year bull market in fixed income will end soon, with interest rates set to rise and lower oil prices boosting growth, according to Ian Williams, Chief Executive Officer at Charteris Treasury Portfolio Managers.

WSJ: – Short-dated U.S. Government bonds rise after jobs report. – (Subscription)  Short-dated Treasury bonds rose on Friday as tame wage inflation offset better-than-forecast jobs growth in December.

 

Investment Grade Bonds

Bloomberg: – U.S. company-bond market set for flurry of sales. – The lull in the U.S. corporate-bond market is poised to end as companies return to finance acquisitions and roll over maturing debt amid forecasts for rising interest rates.

Bloomberg: – Caesars swaps ruling heads to arbitration panel, ISDA says. – An arbitration panel will rule on whether $26.9 billion of credit-default swaps linked to Caesars Entertainment Corp. (CZR) should be settled after a committee of bonds traders failed to make a decisive ruling.

Bloomberg: – Caesars swaps ruling heads to arbitration panel, ISDA says. – An arbitration panel will rule on whether $26.9 billion of credit-default swaps linked to Caesars Entertainment Corp. (CZR) should be settled after a committee of bonds traders failed to make a decisive ruling.

 

High-Yield Bonds

Investopedia: – Is the JNK ETF a good investment? – If you’re thinking about investing in (or trading) SPDR Barclays High Yield Bond ETF (JNK), then there are several things you need to know about the high-yield bond market.

George Putnam: – Where have we been and where are we going? – We remain wary of bonds in 2015 because interest rates have to rise sometime, and 2015 may finally be the year when it happens. Also, with respect to high yield bonds, we expect defaults and bankruptcies to pick up in 2015.

Bloomberg: – Junk-bond baby dumped with bathwater in oil rout, Lillard says. – Prudential Financial Inc. (PRU), the life insurer with more than $1 trillion of assets under management, said investors concerned about possible defaults of oil and gas companies are overlooking opportunity elsewhere in junk bonds.

FT: – Headwinds to slow US high-yield debt sales. – (Subscription) In theory, 2015 could be a fine year for US high-yield corporate debt: the US economy is getting stronger and with stocks on Wall Street still trading near record highs, a slow rise in benchmark rates could be absorbed by company borrowers and investors alike. But in fact, the outlook for the popular securities in the coming months is much less rosy.

S&P Capital IQ: – High yield bond fund cash outflows continue, led by ETFs. – Retail-cash outflows from U.S. high-yield funds totaled $922 million during the week ended Jan. 7, slightly narrower than the $960 million outflow during the week ended Dec. 31, according to Lipper.

 

Emerging Markets

Barron’s: – Closed-end emerging-market bond funds are cheap. – (Subscription) Emerging markets securities are on sale, none more so than a handful of closed-end bond funds.

Bloomberg: – Argentina bond bulls predict world-beating 2015 returns. – Argentina defied a default to deliver some of the world’s biggest bond returns in 2014. This year, the end of Cristina Fernandez de Kirchner’s tenure as president is forecast to produce even bigger gains.

IFR: – JP Morgan forecasts modest returns from EM debt. – JP Morgan forecasts emerging markets hard currency debt will return 4%—6% this year, with spread tightening offsetting higher US Treasury yields.

WSJ: – Why emerging-market debt could balloon in a flash. – A perfect storm could be brewing for emerging-market sovereign debt, the World Bank says.

Businessweek: – Wall Street’s guide to surviving emerging-market despair. – It’s discouraging to be an emerging-markets investor right now. No matter how you slice it, 2014 was a rough year: Stocks posted their second straight 5 percent annual decline; currencies sank to a 12-year low against the dollar; and developing nations’ borrowing costs climbed relative to benchmark U.S. Treasuries. Don’t give up yet.

 

Green Bonds

Globe and Mail: – Income investing: Green bond market is ‘exploding’. – Investors who want to add environmentally friendly investments to their portfolio without embracing a lot of risk don’t have much choice. Most renewable energy stocks have taken wild swings in the past few years.

 

Catastrophe Bonds

ValueWalk: – Catastrophe bond issuance hits record $8.8 billion in 2014, Artemis reports. – The amount of catastrophe bonds and insurance-linked securities (ILS) issued reached a record level in 2014, according to Artemis.bm, a leading online source of news, analysis and data on the growing ILS, catastrophe bond and alternative reinsurance capital markets.

 

Investment Strategy

CNN: – The best way to invest for retirement income. – When it comes to tapping savings in retirement, many retirees fall into what I call the”Income Investing Trap.” They tilt their portfolios almost exclusively toward “income” investments – dividend stocks, high-yield bonds and annuities. They figure this is the best way to assure a safe supply of spending cash throughout retirement. Big mistake.

Kiplinger: – Don’t part with preferred stocks. – In the winter of 2013–14, steals and deals were abundant in such categories as municipal bonds, real estate investment trusts and preferred stocks. Today, though, following big price run-ups, most income categories are no longer cheap. But neither are they overvalued. So what’s an income investor to do?

Investment News: – ETF managers, bringing in historic levels of cash, still preparing for a bear. – As dollars in funds top $2 trillion, managers ready exotic products for a new market environment.

Business Standard: – Ultra short-term funds may perform better in next six months. – Due to volatility expected in bond yields in the first half of the current year 2015, ultra short-term funds are expected to perform better in the next six months than the medium to long-term gilt funds, which gave the highest returns in the debt funds category in 2014.

BlackRock: – Why people tend to use bonds in retirement + how to build a strategy of your own. – There’s a rule of thumb that says bonds are the go to investment for retirees. Matt Tucker explains why this is the case, and how investors should think about bonds as they transition to this next phase.

 

Bond Funds

Investopedia: – 2015’s most promising ETFs. – The lesson 2014’s top exchange-traded funds appear to teach is paradoxical: Bad news can be very good news, at least if you see it coming.

Reuters: – BlackRock’s mutual funds see record inflows in 2014. – BlackRock’s mutual funds posted record inflows in 2014 of $18.9 billion, according to data provided to Reuters by Morningstar.

New York Times: – Pimco cuts access to some quarterly investment reports. – The bond giant Pimco has removed from its website the quarterly investment reports of two large mutual funds that were managed by William H. Gross before he was forced to leave the firm last year.

Barron’s: – 3 problems with passive bond funds. – (Subscription) What’s inside a bond index? It’s not an academic question. Even as passive fixed income fund managers trumpet their relatively low costs, investors in index funds and ETFs may not know what they’re buying.

Morningstar: – ETF Flows Set a Fresh Record in 2014. – The $241 billion of inflows into U.S. exchange-traded funds in 2014 were the strongest ever and topped the $190 billion inflow in 2012. Strong flows and market appreciation helped push assets to $2 trillion, and that milestone comes just four years after hitting $1 trillion.

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