This Week’s Top Bond Market Stories – July 27th Edition

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Learn Bonds: – To-maturity bond funds: Gaining in popularity and a good option. – With interest rates very likely to rise in the upcoming years, there are only three good bond or bond-like investment options for people who are investors vs traders ―well-chosen CDs, individual bonds, and to-maturity-then-cash (TMTC) bond funds. In this article I would like to summarize the factors that determine whether individual bonds, TMTC funds, or a combination of the two are best for you.

Learn Bonds: – How to find opportunities in the municipal bond market. – Municipal bonds are interesting right now after the ‘taper tantrum’ that started at the beginning of May when the Federal Reserve telegraphed its intent to taper off their bond buying program known as quantitative easing. So how do you go about finding the right opportunities in the muni market.

Learn Bonds: – Best Buy’s new 5-year bond yields 5%. – It doesn’t seem like all that long ago that Best Buy’s stock and bonds were tanking and the investment community had the company pegged as doomed. Since the beginning of 2013, however, things have changed. The stock, trading under $12 per share at the end of 2012, recently topped $30. The bonds have also seen notable improvement since the beginning of the year. As the two charts below illustrate, yields on the 2016 and 2021 maturing Best Buy notes have declined significantly in recent months.

Learn Bonds: – How much risk is in your “conservative” portfolio? – Most investment and advisory firms have asset allocation models for their clients with titles ranging from conservative to aggressive. What you should keep in mind, especially in a possible rising interest rate environment is that most of the conservative portfolios will allocate a large percentage to fixed income securities.

Learn Bonds: – Here’s how much Detroit bond exposure your ETF has. – On Thursday of last week, the city of Detroit filed for bankruptcy. This was the largest municipal bankruptcy in United States history.  Given the size of the bankruptcy and the attention it is getting in the press, municipal bond investors should be aware that headline risk is now a reality they must deal with.

Learn Bonds: – What tax rate is applicable to your investment decision? – There is disagreement as to which income tax rate should be applied when deciding whether to purchase, for instance, a municipal bond or a corporate bond. Some people say that you should use the tax rate for your last dollar of taxable income―the highest tax rate applicable to you. Other people say you should use your overall average tax rate. The former is often, but not always, true. The latter is never true. The correct answer depends upon the situation.

WSJ: – Detroit bankruptcy official says no special treatment for general-obligation bonds. – General-obligation bondholders will continue to be treated as unsecured creditors, Detroit’s emergency manager, Kevyn Orr, said in an interview Friday in New York, adding that he is focused on fixing Detroit and not on the implications the restructuring could have on the broader municipal-bond market.

MuniNetGuide: – After Detroit, is Chicago next? – Just when we thought 10-year Treasuries had found some degree of support around the 2.50% level, fresh new supply and hints of economic stabilization in Europe have brought on renewed weakness this week. Traders are also starting to focus on the July employment data due out next week. The 10-year and 30-year bonds closed last night at 2.61% and 3.65%, respectively.

WND: – Junk bonds will crash. – Since early May, the iShares High-Yield Bond Fund (HYG) has given up all the capital gains it made in the previous seven months. And on June 6, market research firm Lipper released data showing a record volume of investor redemption from mutual funds and exchange-traded funds holding high-yield bonds. Investors pulled $4.6 billion out of the high-yield market. It’s time to get out of bonds… especially high yield corporate bonds.

Bloomberg: – Pimco’s Gross says Fed will tighten policy in 2016 at earliest. – Pacific Investment Management Co.’s Bill Gross said he expects the Federal Reserve won’t tighten monetary policy until 2016 at the earliest.

Anthony Valeri: – Municipal bond defaults continue to decline. – The number of muni bond defaults continues to decline with defaults through until June 2013 running at half the pace of 2012.

WSJ: – Bond investors turn to cash. – Investors are cashing out of bonds but remain hesitant to plunge into stocks, preferring instead to buy money-market mutual funds despite their low returns. The surprise move highlights persistent investor anxiety with equities even as stock indexes reach new highs.

Barron’s: – Prepare for weak or negative bond returns. – Steven Wieting, global chief investment strategist at Citi Private Bank, says the current pause in the bond market rout provides investors with “a window of time to prepare portfolios for a more challenging fixed income environment in the years ahead.

Bloomberg: – Bernanke seen slowing QE to $65 billion in September. – Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.

WSJ: – UBS ex-official gets 18 months in muni bond-rigging case. – The former co-head of a UBS AG municipal bond desk in New York was sentenced to an 18-month prison term, the latest penalty in the U.S. government’s years long investigation into municipal bond bid-rigging.

The Reformed Broker: – Chart o’ the day: Rotation now undeniable. – Americans are back to investing for their futures again. It’s a shame they’re coming in so late, but this is the nature of the beast.

Bill Gunderson: – Is your 401-K in all the right places? – Asset Allocation is almost gospel to the investment advisory profession. Classic asset allocation generally calls for a balance between stocks and bonds, depending upon your age and risk tolerance. For instance if you are 60 years old, you should have 60% of your assets in bonds and 40% of your assets in stocks. As you get older, you continue to put more in the so-called “safer” bucket of bonds, and less in the so-called “riskier” bucket of stocks. But what happens when a freight train is headed right for an asset class you’re invested in?

Forbes: – Bond star Gaffney: Sell-off is ‘great opportunity’. – Kathleen Gaffney has had a distinguished long-term career delivering index-thumping returns by casting a wide net across all bond sectors. In a conference call on June 26th Gaffney sounded downright pleased with the recent bond sell off, noting her list of buying opportunities “has gotten quite long the past few days.”

WSJ: – Junk jumps as bonds boom. – Bonds issued by low-rated U.S. companies are making a sound recovery from their spring swoon, in the latest sign investors remain thirsty for income-producing investments.

FT: – Detroit bond decision risks raising costs of other states. – Local governments across the U.S. face potential reviews of their credit ratings and higher funding costs if a financial restructuring proposal for Detroit is endorsed by a bankruptcy judge.

WSJ: – Your portfolio still needs bonds. – Investors are understandably concerned. After all, interest rates are still in a historic low range, and bond returns are likely to be lackluster over the next decade or so—in sharp contrast to the bull market in bonds we experienced over the past 30-plus years. But instead of dumping bonds wholesale or trying to time purchases and sales around interest-rate movements, long-term investors would do well to backspace a moment and ask themselves why they own bonds in the first place.



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