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This Week’s Top Bond Market Stories – January 17th Edition

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Learn Bonds: – The implications of falling oil prices to the U.S. economy. – Cheap oil is both good and bad news for the U.S. As per IMF’s analysis, it is net positive to U.S. economy; every drop of $10 in price adds 0.1% to the US GDP. But oil companies and the Shale industry will suffer.

Learn Bonds: – Debate on ECB’s stimulus continues. – All eyes are on the ECB’s Governing Council meeting scheduled next week in Frankfurt. It will be a crucial meeting on monetary policy.

Learn Bonds: – The agnostic bond ladder strategy might be best. – For the conservative bond investor simply looking for a cash flow stream, I would argue that it makes little sense to churn a portfolio based on interest rate speculation. Creating a bond ladder that totally takes bond prediction out of the equation, or making point in time purchases with an attempt to buy the “sweet spot” of yield, are far more conservative and arguably, rational, ways to buy bonds.

Learn Bonds: – Interest rates fall as inflationary expectations decline. – Interest rates fell again this week and I am still trying to figure out what is going on in the bond market. This time around the yield on the Treasury note is coming down. The recent high was achieved on January 2, 2013 when the yield closed at 3.00 percent. In early 2012, the yield on the 10-year was falling. On May 9 2012, the yield dropped through 1.85 percent to close at 1.81 percent. What’s different? Is there anything we can take away from the earlier dive in interest rates to the July 25 low that might help us understand what is going on now?

Learn Bonds: – India cuts interest rate to boost sluggish economy. –RBI, India’s central bank, cut the repo rate by 0.25 percent to 7.75 % on January 15. Stocks and bonds rallied immediately after the announcement.

To see a list of high yielding CDs go here.

Municipal Bonds

ETF Trends: – Muni Nation: What to know heading into 2015. – We begin this year in a very different place than where we were last January. What will the Federal Reserve do and when? Will the U.S. economy show more than uneven and uncertain improvements? Will economic slowdowns in Europe and China continue to prompt “flights to safety” into U.S. Treasuries, pulling potential positive performance from municipals?

Income Investing: – BlackRock likes barbell approach for Munis. – BlackRock‘s municipal-bond team today points out that the muni market had a “perfectly positive” year in 2014, posting a net gain in each of the years’ 12 calendar months, while muni mutual funds were nearly perfect on a weekly basis, posting net inflows in 50 out of 52 weeks. For 2015, BlackRock says investors should adopt a barbell strategy focusing on short-dated bonds maturing in two years or less and long-dated bonds maturing in 15 to 20 years.

Bond Buyer: – Defaults reached record in 2014. – Municipal bond defaults increased to record levels last year, as Detroit’s bankruptcy boosted the total.

WSJ: – Don’t let muni-bond markups sap your returns. – (Subscription) Investors seeking to buy municipal bonds should watch out for the markups that plague the market for debt sold by U.S. cities, states and other public entities.

Reuters: – U.S. muni bond funds post $688.5 million in inflows. – U.S. municipal bond funds reported $688.5 million of net inflows in the week ended Jan. 14, about half the $1.3 billion in inflows the previous week, according to data released by Lipper on Thursday.

 

Education

ETF Trends: – Bond basics for retirees. – In two recent Blog posts, I explored how bonds aren’t just for old people – first taking a look at the ways millennials can use bonds, then providing tips for 30-somethings (and beyond) to put bonds to work. The story wouldn’t be complete without some bond basics for retirees, so that’s what I’ll walk us through today.

 

Bond Market

NY Times: – For bond investors, that other shoe still didn’t drop. – BONDS confounded conventional wisdom in 2014 with a much-better-than-expected return. Yet the bellwether Treasury note ended 2014 at 2.17 percent after starting it at 3 percent. And while the United States economy showed some vigor — typically a trigger for rates to rise — global investors fleeing weakness in other markets were eager to buy American bonds. That demand pushed bond prices higher and yields lower.

FT: – Bond yields slide as oil plunges afresh. – (Subscription) As stocks wobble, so sovereign debt attracts more funds, pushing yields lower. The dollar index is up 0.3 per cent at 91.26, a fraction shy of the nine-year high touched last week.

BlackRock: – Bond market surprises and lessons learned. – While interest rate movements in 2014 may not have aligned with expectations, Matt Tucker provides some key takeaways investors need to know.

Business Insider: – Jeff Gundlach unveils his outlook for 2015. – Among the things Gundlach believes 2015 has in store for the market is more volatility, lower Treasury yields, and a Federal Reserve rate hike, “just to see if they can do it.”

ETF Trends: – Bond market surprises and lessons learned. – What a difference a year makes when it comes to expectations versus reality. Case in point: at the end of 2013, most interest rate strategists expected 10 year Treasury rates to rise to the 3.5% to 4.5% range over the course of the year. Clearly they were mistaken. Instead, bond yields surprised many investors by falling instead of rising.

 

Treasury Bonds

WSJ: – Fed’s bond buying yields bonanza for Treasury. – (Subscription)  The Federal Reserve sent a record $98.7 billion in profits to the Treasury Department in 2014, largely reflecting higher interest earnings on its big bond holdings.

Morningstar: – Treasury bonds rally on falling oil; strong three-year note auction. – Treasury bonds posted a broad price rally on Monday, boosted by falling oil prices and surging demand on a $24 billion sale of three-year U.S. government notes.

Reuters: – Fed’s Kocherlakota ‘uneasy’ about low longer-term rates. –  A top Federal Reserve official said on Tuesday he was “uneasy” about the low long-term yields on Treasury bonds because it shows there are fewer safe assets for investors and it suggests rates could be persistently low in the future.

CNBC: – Bond rally cools after Beige Book, weak auction. – U.S. Treasury prices pared some gains on Wednesday after the government’s auction of 30-year bonds and the release of the Fed’s monthly Beige Book report on business activity.

WSJ: – U.S. Government bond yields fall for fifth straight session. – (Subscription) A major policy shift from Switzerland’s central bank on Thursday sent ripples through the global markets, pushing many yields in the developed world to fresh lows.

 

Investment Grade Bonds

FT: – High-grade energy bonds embark on rally. – (Subscription) Bonds sold by some of the world’s largest energy companies have appreciated in value this month as investors look beyond sliding oil prices and focus on a buying opportunity in the sector.

Bloomberg: – Treasury rally prolongs company long-bond boon. – Corporate borrowers in the U.S. have boosted the average maturity of their bonds to the most since at least the 1990s as borrowing costs slump, reducing the risk that they will be exposed to a sudden rise in interest rates.

 

High-Yield Bonds

Market Realist: – Why high yield bonds are not good diversifiers. – From a portfolio diversification point of view, the correlation between two asset classes should be close to zero. High yield bonds have a correlation of 0.68 with investment grade corporate bonds, showing a moderate relationship. Hence, high yield bonds are not good diversifiers.

Morningstar: – High-yield bonds poised to outperform in 2015. – With falling interest rates behind us, we expect the high-yield market will outperform the investment-grade market, even if we see some energy-sector defaults.

S&P Capital IQ: – High yield bond prices continue upswing amid broad market gains. – The average bid of LCD’s flow-name high-yield bonds advanced 79 bps in today’s reading, to 99.82% of par, yielding 6.35%, from 99.03, yielding 6.61%, on Jan. 8. Gains were widespread, with 10 of the sample’s constituents in the black, against three unchanged, and two modest decliners.

Market Realist: – Junk bond yields are high, but beware of the caveat. – So what are the considerations for investing in high yield bonds? The obvious attraction is yield, particularly for income seeking investors battling with a prolonged low interest rate environment. However, it’s important to note that this yield comes at a price – namely, higher credit risk than most fixed income securities, and therefore a higher risk of default.  It’s this perilous reputation that earned them the moniker “junk” bonds.

Fast FT: – Respite for junk bond market as investors pile in. – The junk bond market snapped a six-week streak of outflows. Investors poured $880m into mutual funds and exchange traded funds investing in the securities in the week ending January 14, according to new data from Lipper.

 

Emerging Markets

IFR Asia: – Janus cautious on EM debt. – Janus Capital Group has been attracting eye-popping fund inflows since Bill Gross joined from Pimco last year, but emerging-market credits, especially those in Asia, may not be the key beneficiaries.

Bloomberg: – China plays wildcard in bets on Venezuela bond default. – For debt investors betting Venezuela will default this year as oil slumps, there is one big wildcard that threatens to sink the trade: China.

FT: – Investors turn to Mexico bonds for yield. – Investors have been flocking to Mexican government bonds, pushing yields on some of the country’s long-term debt to the lowest since 2013 as US Treasury yields fall and the country’s economic prospects brighten on the back of a U.S. recovery.

Bloomberg: – Short sellers now taking aim at emerging-market bonds. – The combination of plunging commodity prices and a soaring dollar is drawing short sellers to emerging-market debt.

 

Catastrophe

Artemis: – ILS & cat bond rates & excess return declined at slower pace in 2014. – While both the average rate-on-line and the excess return of insurance-linked securities (ILS) and catastrophe bonds declined considerably in 2014, it was at a slower rate than that seen in 2013, according to the latest report from Lane Financial.

Artemis: – $2.7B of catastrophe bond maturities shrink ILS market as 2015 begins. – Having reached the largest size in its history at the end of 2014 at $25 billion, the catastrophe bond and ILS market has now shrunk by almost $2.7 billion, as vintage deals mature at the start of 2015, leaving the outstanding market at $22.337 billion today.

 

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.

Money Management: – Corporate and municipal sectors drive green bond explosion. – Rapid growth in the green bond sector continued in 2014, with US$36.6 billion worth of bonds issued — more than triple the value of the 2013 issuance.

 

Investment Strategy

David Fabian: – 3 investments Jeffrey Gundlach loves in 2015. – During Jeffrey Gundlach’s “2015 Market Outlook” he spoke favorably about the underlying fundamentals in the strong U.S. dollar despite its rapid ascent last year and how currency trends can be “persistent and long lived”. Gundlach also spoke favorably about gold as a flight to quality instrument.

MarketWatch: – Diversification won’t work in 2015. – Last year, you didn’t really need diversification, and it didn’t really help you. This year, you may well need to be diversified, but it’s not going to save you.

Benzinga: – Deutsche Bank’s 10 investment themes for 2015. – Analysts at Deutsche Bank outlined their views on ten investment themes for 2015: Including their outlook for global fixed income, emerging market debt and interest rate expectations.

Morningstar: – Watch your step when using bond ladder ETFs. – Bond ladder ETFs can reduce cost and risk and can increase liquidity. However, investors should be aware of some potential drawbacks.

ETF Trends: – Where defined-maturity ETFs fit into a fixed-income portfolio. – Fixed-income investors who are adhering to a specific investment timeline can utilize target-maturity exchange traded funds to meet their goals.

 

Bond Funds

Pensions and Investments: – Dodge & Cox grows on performance, PIMCO flow. – Assets under management at the San Francisco-based firm reached $270 billion as of Dec. 31, the highest in its 84-year history, company data show.

Reuters: – Pimco taps Seidner to revive unconstrained bond fund. – Pacific Investment Management Co has named Marc Seidner, chief investment officer for non-traditional strategies, lead portfolio manager of the Pimco Unconstrained Bond Fund, the firm said in a regulatory filing on Monday.

Morningstar: – 2 ETFs for Eurozone bond exposure. – Two ideas for investors seeking yield from government or corporate bonds amid eurozone quantitative easing.

Bloomberg: – Gundlach’s DoubleLine plans its first infrastructure fund. – Jeffrey Gundlach’s DoubleLine Capital plans to start its first fund dedicated to finance projects such as bridges, roads and tunnels.

Stock Traders Daily: – The bond market is telling you something. – Market declines are one thing, but when the bond market is telling you something you definitely should listen. The bond market is largely comprised of much smarter investors, their time horizon and their diligence surpasses the objective of most stock market investors, and that is usually where you find big money. When big money is talking to you they do it with their pocketbooks, and when there is a vocal as they are today you better open up your ears.
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