This Week’s Top Bond Market Stories – November 8th Edition


Learn Bonds: – REITs are an inferior form of real estate investing. – Real estate investment trusts have become quite popular in recent years, as the Fed’s easy-money policies have sent investors to all corners of the financial markets in search of yield.  From my perspective, buying the common stock of publicly-traded REITs is an inferior form of real estate investing.

Learn Bonds: – Strange days in the bond market. – The bond market believes that it marks move to a new normal. It is our opinion that instead of all rates moving higher, the first Fed Funds Rate hike will result in a flattening of the yield curve.

Learn Bonds: – Quantitative easing has ended, what’s the effect on bonds? While the forward consequences of an end to QE are a bit hazy, a light at the end of the post-financial-crisis tunnel seems to finally be emerging. Though a tightening bias on behalf of the Fed would not necessarily be a positive development for bond investors, it probably is not reason for panic either. In the end, a higher rate environment could signal a return to economic normalcy which in and of itself would be a societal positive, given recent travails.

Learn Bonds: – Most analysts missed on 2014 rate forecasts – What about 2015? – Some analysts are wondering whether or not the economy can really continue to grow…even at its current tepid pace…after this long of a time period. History certainly doesn’t support the possibility.

Learn Bonds: – Exchange Traded Debt – Why do companies issue debt? – Exchange traded debt securities are perfect for income and retirement investors, because they provide the safety of bonds, but the yields of preferred stock, and liquidity of equities. It’s the happy medium for investment.


Municipal Bonds

Detroit News: – Judge approves Detroit exit from bankruptcy. – A judge Friday approved Detroit’s plan to shed $7 billion in debt, calling it “an ideal model” for restructuring a broken city while acknowledging the pain imposed by the biggest bankruptcy case in U.S. history.

WSJ: – Returns on muni bonds soar. – (Subscription) Investors seeking higher returns are finding them in an unexpected place: the market for debt sold by states, cities and government-related entities.

WSJ: – Michigan city settles SEC fraud charges in municipal bond sale. – (Subscription) The city of Allen Park, Mich., and two of its former officials settled fraud charges related to the sale of a $31 million municipal bond issue to raise funds for a movie studio project to spur needed economic development, according to the Securities and Exchange Commission.

Reuters: – Muni investors worried about tax impact from U.S. midterms. – Sweeping changes in the Senate have rekindled old worries for U.S. municipal bond investors about a clean-up of the tax code that could impact bonds, however, fundamental changes to the tax treatment of munis is seen unlikely.

Bloomberg: – Martha’s Vineyard conservancy offering $35 million. – A conservation agency on Martha’s Vineyard, Massachusetts, is selling $35 million of debt to refinance bonds for renewable land-use projects including a campground for cyclists.

Income Investing: – Bondholders losing ground to retirees in muni bankruptcies. – As two of the biggest municipal bankruptcies are winding down, they’re leaving behind precedents for future cases that seem to increasingly benefit retirees at the expense of bondholders.

Reuters: – Muni bonds lose favor in repo market after new capital rules-study. –  Rules excluding municipal bonds from assets that banks can use to meet capital requirements have led to a sharp decline in their use in the repo market, with buyers asking for more collateral in muni bond transactions, according to an analysis by Markit.


Bond Market

Think Advisor: – What QE’s end may (really) mean for bonds. Investors and advisors alike may be surprised at recent fixed-income results.

Bloomberg: – Fink joins El-Erian highlighting cost of easy central banks. – Cheap cash is losing its allure among asset managers, and even the chief providers of loose monetary policy are warning of the disadvantages of low interest rates.

Financial Advisor: – Embracing bonds. – Higher economic growth and inflation could push 10-year Treasury yields to the 2.5%-3% range by year’s end. This is barring a surprise such as a major stock correction or an outside event like the acceleration of a war or continued unrest in the Middle East or Ukraine.

FT: – U.S. investors try to read between the lines. – Bond and equity markets are telling different stories. The obvious bond market story is of slow growth, stagnant inflation, and a Federal Reserve unlikely to raise rates as far or fast as once thought. There is an alternative narrative.

Financial Planning: – Next year could be bumpy for debt markets, says Schwab strategist. – Kathy Jones, a Schwab vice president and fixed-income strategist at the firm’s Center for Financial Research, says she’s heard both market optimists and pessimists advocate a move to riskier assets next year, Jones suggests a different strategy. In her view, the year is likely to bring slow to moderate economic growth, low inflation, a moderate rise in rates and a flatter yield curve.


Treasury Bonds

WSJ: – U.S. Government bond yields rise to near four-week high. – (Subscription) Treasury bonds slipped Monday as an upbeat U.S. manufacturing report raised some concerns that the Federal Reserve may raise interest rates sooner than investors were expecting.

ETF Trends: – Foreign investors prop up Treasury ETFs. – The Federal Reserve ended its quantitative easing program, but Treasury bond securities and related exchange traded funds won’t suddenly fall out as foreign investors help pick up the slack.

MarketWatch: – Why U.S. Treasuries struggle with the FOMC and GDP growth. – Treasury markets have been a buffer for global investors in 2014. Concerns over international growth and geopolitical risks have seen long-term Treasuries benefit significantly.


Investment Grade Bonds

WSJ: – Apple sells bonds in Euros. (Subscription) The iPhone maker issued its debut non-dollar bond Tuesday, offering €2.8 billion ($3.5 billion) in debt maturing in eight and 12 years, following up on a plan outlined earlier this year to broaden the number of investors it can borrow money from.

Market Realist: – Must-know: What investment-grade corporate bonds expect in 2015. – There are a few bright spots for bond investors, especially high-quality corporate debt and Treasuries. Japan’s expanded stimulus was announced just days after the Fed’s exit. There’s also the possibility that the European Central Bank (or ECB) will follow Japan’s example and boost the struggling Eurozone economy. Expanded stimulus by central banks usually boosts liquidity in global financial markets (or QWLD).

Moneybeat: – Apple isn’t the only company borrowing on the cheap. – For its first non-dollar bond sale Tuesday, Apple Inc. was able to issue some of the cheapest euro-denominated bonds ever. Moneybeat decided to take a look at what other corporations have generated the lowest borrowing rates in both dollars and euros. Unsurprisingly, the lowest cost debt has been issued in the past several years, as central banks around the globe have held down interest rates.

WSJ: – Walgreen prepares large bond sale for Alliance Boots deal. – (Subscription) Walgreen Co. is expected to begin selling as much as $10 billion in bonds in dollars, euros and British pounds as early as this week, in a sale that would rank among the largest corporate bond deals this year.


High-Yield Bonds

Market Realist: – Why junk bond spreads react to market momentum. – Yields on corporate debt securities are based on a spread over Treasury securities of similar maturities. When the economy is trending up, this benefits the revenues and profits of firms. They have an improved ability to make the payments on borrowings. This decreases their risk relative to Treasuries, resulting in relative lower credit risks and spreads.

fastFT: – Investors pour into junk bonds for third week. The end of the Federal Reserve’s quantitative easing programme has worked out well for junk bonds. Last week alone mutual funds and exchange traded funds investing in the securities saw $2.44bn in inflows in the week through Wednesday, according to Lipper.

NY Times: – A recent surge of leveraged loans rattles regulators. – In recent months, the Federal Reserve and the Officer of the Comptroller of the Currency have intervened to tamp down the market. Leveraged loans are made to companies with low credit ratings that could suffer high losses in a downturn. As a result, the regulators have tried to stop the banks they regulate from arranging certain types of leveraged loan deals.

Bloomberg: – New junk-bond derivatives are hot as traders get creative. When it gets tough to maneuver in the junk-bond market, traders can either give up or get creative. Many of them are opting for creativity these days.

WSJ: – Lennar said to withdraw $350 million junk-bond sale. – (Subscription) Lennar Corp. has withdrawn a proposed $350 million sale of five-year, speculative-grade bonds, according to a person with knowledge of the transaction, who asked not to be identified, citing lack of authorization to speak publicly.


Emerging Markets

Covering Companies: – Becoming bearish on emerging markets. Emerging market bonds—debt issued by developing countries and economies—are seen as the best way to diversify a debt portfolio against smaller gains in United States Treasuries.

Gary Gordon: – When will emerging market ETFs join the ‘risk-on’ party? – The world’s semi-coordinated effort to fight deflation as well as pump up gross world product has sent a number of ETFs onto the list of New 52-Week Highs. Emerging markets are neither seeing the love in price appreciation or inflows. One might be better served to watch for the possibility of a relative strength revival from the basic materials sector.

Indexology: – Diversifying into Chinese bonds. – Investing into Chinese bonds adds diversification benefits to a portfolio through the exposure to local rate, credit and currency. According to the S&P China Bond Index, the Chinese bonds have historically exhibited low to negative correlations to U.S. bonds.

Emerging Markets Daily: – Moody’s: Junk bond issuance drops in Latin America. – Even as Latin American companies have issued more bonds in 2014, far fewer are junk. In a report published today, Moody’s says that while the total new issuance volume of corporate bonds for Latin American non-financial companies rose 2% so far this year, the issuance of high yield debt during the first nine months of 2014 has dropped 25% compared to the same period last year.

The Economist: – Invisible bonds. – Foreign borrowing by emerging-market firms is higher than it seems. Since the financial crisis, big Western banks, short of capital and weighed down by regulation, have become much less enthusiastic about lending to companies in emerging markets.


Catastrophe Bonds

Insurance Journal: – Hedge funds need to be wary of push into catastrophe risks. – Hedge funds looking for new investments may be pushing too fast into insurance, said Michael McGavick, the chief executive officer of XL Group plc. McGavick joins Franklin Montross, the CEO of Berkshire Hathaway Inc.’s General Re, and Ace Ltd.’s Evan Greenberg in saying that new sources of capital may not appreciate how much can go wrong in weather-related bets, even with historical data that is used to model the chance of storms.


Investment Strategy

WSJ: – Where do alternatives fit in a portfolio? – (Subscription) So-called liquid alternative funds have begun their march from the fringe to the mainstream, some investment professionals say. But the increase in popularity of holdings such as “long short” funds and “unconstrained” bond funds raises questions about where they fit in an investment portfolio.

Market Realist: – Using sector rotation during rising interest rates. – So how can an investor use sector rotation during a rising rate period?  By rotating some assets out of fixed income sectors that tend to underperform in this kind of environment and into sectors that tend to benefit.

ETF Trends: – Build a solid portfolio with index ETFs. – It’s fun to bet on niche areas markets and win big, but when constructing a long-term investment portfolio, investors are better off sticking to simple and broad exchange traded funds.

Forbes: – Bond buyer’s survival guide. – If you have an investment account of any size you have probably heard from the broker about buying individual bonds. The problem with buying bonds one at a time is that you need $100,000 trades to have any chance of getting a decent price and you need 50 issues to diversify your credit risk. If you are investing $5 million and can devote 40 hours a week to reading indenture statements, maybe buy some bonds. If not, you really should be in a bond fund.

Barron’s: – Understanding unconstrained fixed income. – Unconstrained investing is a style of investing; it refers to the portfolio manager’s opportunity set. Unconstrained portfolio managers are not held to a benchmark; instead they are free to pursue their best ideas, often across a variety of asset classes, security types, and sectors. With the prospect of rising rates increasingly likely, that flexibility can be especially useful. Unconstrained portfolios stand in direct contrast to benchmark-aware, or indexed, strategies.


Bond Funds

MarketWatch: – There’s no need to wait to buy bonds. – The bond market has been on a roll. bonds are strong, and they’re bullish. And as we’ve been saying for most of the year, they’re likely headed higher.

Bloomberg: – Pimco clients pulled EU49.2 billion in third quarter. – Pacific Investment Management Co. suffered 49.2 billion euros ($60.9 billion) in investor redemptions in the third quarter, when the firm’s co-founder Bill Gross unexpectedly left.

Reuters: – DoubleLine attracts $2.38 bln net inflows in Oct, record for year. –  Jeffrey Gundlach’s DoubleLine Funds, an investment firm that has been a major rival of bond fund giant Pimco, reported its ninth consecutive month of inflows in October, totaling $2.38 billion, a record for monthly inflows so far this year.

Morningstar: – Is your short-term bond fund more risky than you thought? – Investors might be surprised by the low-quality profiles of some sizable funds.

Bloomberg: – Vanguard gets record $163.4 billion in 2014 investor cash. – Vanguard Group Inc., the largest U.S. mutual-fund firm, attracted more money from investors in the first 10 months of 2014 than it has in any full calendar year in its 39-year history.

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