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This Week’s Top Bond Market Stories – October 18th Edition

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Learn Bonds: – A 6% yielding bond from a company you’ve overlooked. – Why might many investors have overlooked the 2024 notes and other R.R. Donnelley bonds?

Learn Bonds: – A global economy with a split personality. – It was not supposed to be like this. 2014 was supposed to be the year when the U.S. economy reached escape velocity, the Eurozone was expected to throw off the shackles of a sovereign debt crisis on the periphery, China was supposed to fulfill its destiny and South America was expected to rival its neighbors to the north. Still some of the U.S. economic data has been encouraging. The best way we can describe economic conditions is, bipolar.

Learn Bonds: – Volatility in stocks means value in bonds. – While most investors may see little value in bonds, I continue to believe that if a sharper sell off than one might expect hits stocks, the value in having a portion of one’s portfolio allocated to bonds will become very apparent.

Learn Bonds: – Bond yields drop even further. – Just when you think they couldn’t go any lower… bond yields drop even further. The same day, the yield on the 30-year US Treasury bond fell below 3.00 percent.  This yield had not been this low since early May, 2013. It just seems as if investors are getting more and more pessimistic about economic growth.

Learn Bonds: – Making sense of the bond market with the bond squad. – As we awoke from our slumber this morning, the yield of the 10-year U.S. Treasury stood at 2.196% (barely breaking through the bottom end of our 2.20% to 2.80% range). However, its time there was short-lived as better earnings from C, WFC and JNJ relieved some fears. We believe that there are sufficient global headwinds to prevent long-term rates from rising dramatically, but enough domestic growth to prevent U.S. long-term rates from falling much farther.

To see a list of high yielding CDs go here.

 

Municipal Bonds

WSJ: – Puerto Rico sells $900 million of short-term notes. – (Subscription) Puerto Rico sold $900 million of short-term notes bearing interest rates of as much as 7.75%, its first debt offering since the passage of a law paving the way for a possible restructuring of some of its agencies’ obligations.

Mutual Fund Observer: – Municipal bond market risk: Liquidity. – Reduced municipal-market liquidity has forced managers to operate in a less benign environment, since the implementation of the Dodd-Frank Act and the exclusion of municipal bonds from the approved list of high-quality liquid assets (HQLAs), according to Nick Venditti.

Reuters: – UBS to pay $5.2 mln in settlement with Puerto Rico regulator. – A UBS AG unit will pay $5.2 million in a settlement with Puerto Rico’s financial institutions regulator over the firm’s practices involving sales of Puerto Rico closed-end bond funds whose values later plunged.

Bloomberg: – School tech bonds helping Scarsdale lost on Yonkers. – Governor Andrew Cuomo wants to borrow $2 billion for classroom technology in what would be New York’s biggest school-bond issue since 1997. Yet education groups say they didn’t ask for it, and some districts say they’d rather add teachers or universal pre-kindergarten.

Bloomberg: – Puerto Rico bonds set for longest slide since July. – Puerto Rico securities are poised for their longest skid since July as hedge funds and other distressed investors sell the junk-rated island’s debt, which has outperformed the municipal market for most of 2014.

 

Bond Market

Bloomberg: – Pimco to Barclays: Your bond index is hurting investors. – Barclays Plc (BARC) is pressuring investors to hold expensive mortgage securities by filling its closely followed bond index with debt the Federal Reserve has been gobbling up, according to Pacific Investment Management Co.

Business Insider: – Market correction last week…did you see the opportunity? – While stocks fell around the world last week amid growing concerns over global economic growth, Europe’s slowdown can’t stop emerging market population growth that drives long-term commodity demand. If the short-term market volatility concerns you, a solution is short-term tax-free municipal bonds.

Reuters: – Oil crumbles, bond prices up on economy fears. – Brent crude prices marked their biggest decline in more than three years on Tuesday and U.S. and German debt attracted buyers on lingering anxiety over world economic growth.

WSJ: – Bullard says Fed could delay planned end of bond-buying program. – The Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling U.S. inflation expectations, Federal Reserve Bank of St. Louis President James Bullard said Thursday.

MarketWatch: – Volatile bond market crowns winners and losers. – As volatility re-enters the bond markets, not all asset classes are acting the same way.

 

Treasury Bonds

Bloomberg: – U.S. two-year notes poised for biggest weekly gain since 2011. – Treasuries gained, with two-year yields set for the biggest weekly drop in more than three years, as investors pared expectations for interest-rate increases after the Federal Reserve highlighted risks to the U.S. economy.

Bloomberg: – U.S. stocks gain as bond yield drops below 3%; oil slips. – U.S. stocks rose, led by a rally in small-caps, on speculation the worst three-day selloff since 2011 was overdone. Oil extended a rout and 30-year Treasury yields fell below 3 percent for the first time since 2013.

FT: – Bond yields plunge on growth fears. – Simmering uncertainty across financial markets over the outlook for global growth boiled over on Wednesday, briefly driving the 10-year US Treasury bond yield below 2 per cent and pushing the S&P 500 index beneath the level at which it started the year, before some signs of stability began to emerge.

FT: – Treasury bonds’ “flash crash” – (Subscription) John Authers reports at the end of a Wall Street trading that saw 10-year treasury yields drop 35 basis points in minutes, and then retrace most of that fall in a matter of hours. What does it mean for equities, and for the world economy?

USA Today: – Foreign holdings of Treasury securities climb. – Foreign buyers of U.S. Treasury securities boosted their holdings in August to a record high. China, the largest foreign owner of Treasury debt, increased its holdings after two months of reductions.

 

Investment Grade Bonds

Reuters: – Spin-offs add to high-grade woes. – The investment-grade bond market has been slammed with another wave of bondholder-unfriendly news, with spin-off announcements from Hewlett-Packard and Symantec and activist pressure on EMC Corp to follow suit.

Morningstar: – Heightened volatility results in sloppy corporate bond trading. – While marriages are increasing in the health-care sector, conscious uncoupling increases in the technology sector.

WSJ: – Stocks’ swoon sends chill through corporate-debt market. – (Subscription) Corporate-bond investors have struggled this week to find trading partners for some large orders, causing unusual price drops and raising concerns that trading could freeze in future market turmoil.

WSJ: – Watch corporate bonds for clues to markets’ meltdown. – The reversal in markets in October has been sharp. But is it the start of something more sinister, or is it just a scare? Investors should watch the corporate bond markets for an answer.

WSJ: – Corporate cash continues to flood into corporate debt. – (Subscription) Companies continued to put an ever-higher proportion of their cash piles into corporate debt in September, sending the asset category to another record high in at least six years of record keeping.

 

High-Yield Bonds

Bloomberg: – Dynegy sells $5.1 billion in junk bonds as yields rise. – Dynegy Inc. (DYN) sold the biggest U.S. junk-bond offering since April’s record deal by billionaire Patrick Drahi just as borrowing costs for speculative-grade firms climb to the highest in almost a year.

Hawkinvest: – Junk bond CEFs could be poised for a pullback. – Junk bonds are in the midst of a pullback. The market is in a period of high volatility, and less liquid investments like closed-end funds could pose higher risks at this time. Investors should consider their exposure to less liquid investments, and perhaps even sell CEFs that trade at a premium to net asset value in order to reduce risks.

StackStreet: – Vulnerable high yield bonds fall in price prior to spike in defaults. – Many market prognosticators are calling for significant spikes in the US corporate high yield default rate, starting in 2016 and likely sustaining to 2018-2020.  Does that mean that we should try to time being short closer to 2016?

Bloomberg: – Pimco’s Mark Kiesel says buy high-yield debt, loans. – Mark Kiesel, chief investment officer of global credit at Pacific Investment Management Co., says riskier debt is attractive after a selloff pushed yields to the highest level in more than a year.

S&P Capital IQ: – As market gyrates, high yield bond funds see $549M cash withdrawal. – Retail-cash flow turned negative for U.S. high-yield funds in the week ended Oct. 15, with a net outflow of $549 million, according to Lipper. The figure represents outflows of $565 million from mutual funds against a small inflow of $16 million to exchange-traded funds, or inverse 3% for the week.

 

Emerging Markets

NY Times: – In emerging-market bonds, political risk is a constant. – When Argentina defaulted on its sovereign debt in July, investors seemed to shrug. Money kept flowing into mutual funds and exchange-traded funds that invest in emerging-market bonds, as it has for much of the last five years.

Trading Floor: – Is it too late to jump on the ‘bond wagon’? – With equities taking a hammering in European markets and as Eurozone woes multiply, investors are as ever being urged to diversify. Is it too late to jump on the ‘Bond Wagon’? Simon Fasdal, Head of Fixed Income Trading at Saxo Bank looks into the opportunities available, especially in Emerging Markets where sure there’s risk but it’s perhaps clearer to assess than in Europe and the US.

Camradata: – Emerging markets debt investors breathe a sigh of relief as election cycle ends. – Major elections and political activity will pave the way for sought-after reforms, according to Lazard Asset Management. The global investment manager, which has over £107.6 billion invested for clients, says that despite poor performance for local assets due to a sell-off in emerging markets currencies, a correction in emerging markets debt should contribute to an attractive 2015 for emerging markets debt investors.

Foreign Policy: – Emerging markets offer no shelter from the storm. – Though the market panic over the past two days is broadly seen as having been sparked by fears about the European economy, smaller developing countries haven’t escaped the rout.

 

Green Bonds

Financial News: – Investor interest helps green bonds grow. – When asset owners and fund managers with combined assets of $2 trillion under management make a commitment, it carries some weight.

Reuters: – Green bond boom at risk without rules: Zurich Insurance. – The integrity of the fast-growing “green bond” market is at risk unless a clear definition of what passes for green can be agreed, Zurich Insurance’s investment chief told the Reuters Global Climate Change Summit.

 

Catastrophe Bonds

Steve Evans: – Are investors compensated for uncertainty in indemnity cat bonds? – An interesting question was raised at the recent 2014 Bermuda in Boston conference held by investment bank Macquarie, whether ILS investors are being compensated sufficiently for uncertainty in some indemnity catastrophe bonds and ILS transactions.

Artemis: – Record year of $9Bn of ILS and catastrophe bonds still possible. – Despite a slow third-quarter Willis Capital Markets & Advisory still expects that 2014 issuance of new catastrophe bonds and insurance-linked securities (ILS) can break the previous record set in 2007, with as much as $9 billion possible.

 

Investment Strategy

AllianceBernstein: – Five ways to keep out of the bond liquidity trap. – Bond investors are used to managing interest-rate risk and credit risk. But the financial crisis should have taught us that there are times when liquidity risk can be just as important to manage. Now is one of those times.

Scott’s Investments: – Dual momentum ETF portfolio for October. – Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

Citywire: – Banking and mining pair trade play pays off for €630m bond manager. – Kames Absolute Return Bond Fund manager Colin Finlayson has been using pair trades in the mining and banking sector to eke out extra alpha for the £500 million (€630 million) fund.

Businessweek: – Wall Street’s buy signals ignored as junk loses. – Wall Street’s declaration in recent weeks that it was all-clear to dive back into junk bonds is proving premature as new concerns over the health of the global economy collide with reports showing investors’ protections in the debt are the weakest on record.

All Star Charts: – This chart still suggests buying bonds and selling stocks. – With the recent hoopla surrounding the bond market and stock market these days, I think it’s important to take a step back and really put things into perspective. A chart that we brought up back in May was the US Treasury Bonds vs S&P500 ratio when it first approached the 2007 lows. I think where we stand today, this chart looks even better than it did then. Granted it’s up 10%, but still.

 

Bond Funds

Investors.com: – 5 top bond mutual fund categories aren’t the biggest. – The top-performing bond mutual funds this year and for the past five years aren’t the ones where investors have invested most of their assets.

Reuters: – Record assets in global bond ETFs as managed funds’ appeal fades. – Assets managed by global bond exchange-traded funds have hit an all-time high of $441 billion (274.72 billion pounds), while money flows out of actively-managed hedge funds, financial information provider Markit said on Tuesday.

ETF Trends: – These leveraged ETFs are burning investors. – When properly used, leveraged exchange traded funds can be potent tools. The temptation of that potency must be accompanied by the reminder that these products are best suited for active, risk-tolerant traders, something that both ProShares and Direxion, the two largest issuers of leveraged of inverse and leveraged ETFs, do a good job of explaining to investors on their web sites.

Philly.com: – Vanguard assets up $1 trillion, fees up $1 billion/year, since 2011. – Vanguard now manages more than $2.7 billion in the U.S., which is 18% of the mutual fund business, according to data founder John C. Bogle sent Vanguard managers and posted on his Web site for the company’s 40th birthday last month. Worldwide assets top $3 trillion. Vanguard has more than doubled since 2009, which was a record year for Vanguard despite the stock market collapse, as investors snapped up its bond funds; the group has added more than $1 trillion more just since 2011.

Investors.com: – Why Bill Gross went to an unconstrained bond fund. – Recent headlines made a big deal of the fact that star mutual fund manager Bill Gross was taking the reins of an unconstrained bond fund at Janus Capital — Janus Global Unconstrained Bond — after his departure from Pimco. But the term unconstrained is new to many investors. Their key trait is leeway to invest in any fixed income or cash that their managers want.

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