Treasury Yields Should Start to Climb and Today’s Other Top Stories

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The decline in U.S. 10-year Treasury yields this year has been put down to plunging European sovereign bond yields. And that doesn’t look like it’s going to end anytime soon as the European Central Bank is just starting its bond-buying program as the Federal Reserve winds its quantitative easing down.

But Barclays cross-asset researchers Jim McCormick and Tal Shapsa don’t agree. Michael Aneiro of Barron’s Income Investing blog writes that McCormick and Shapsa said in a report released today that while developed-market bonds are highly interconnected, they’re no more so than equity markets, and that the decline in U.S. 10-year Treasury yields this year ““can mainly be explained by U.S. factors, and these factors are beginning to shift higher.”

The pair added that lower German bund yields “should not preclude higher U.S. 10-year yields – and now looks like a reasonable time to be short U.S. fixed income.” This from Barclays:

Current US 10y yields look broadly consistent with cyclical US factors, though this is changing. Another way of thinking about this is to ask whether US cyclical drivers can help explain the decline in US bond yields in 2014. We think the answer is mainly yes…. [O]ur simple cyclical framework for 10y US yields [is] a combination of short-end rates (US monetary policy), core PCE and the manufacturing PMI….

[I]f we plug in our economists’ expectations of higher core PCE and better US growth, and a correction in shorter-end yields toward the median Fed “dots”, we arrive at a framework level for US 10y yields somewhere in the region of 3.25-3.5%. The last time we saw a gap between model and actual yields that large was just prior to Fed Chairman Bernanke’s famous “tapering” speech in May 2013. To be fair, gaps between the market and the framework can last a very long time. Still, the main point of this exercise is to suggest lower US yields can be mainly explained by US factors, with perhaps some downward pressure coming from global factors, including sharply lower bund yields.


Todays Other Top Stories

Learn Bonds

LearnBonds: – Price Inflation – A history lesson. – In today’s day and age, it seems like everyone expects a future filled with price inflation.  And who can blame people?  Over the past 50 years, prices have increased seven-fold. That’s not a typo. According to the Bureau of Labor Statistics’ “CPI Inflation Calculator,” on average, what you could buy for $1 in 1964 will now cost $7.69. If you are a young person getting ready to enter the workforce, let that figure sink in.


Municipal Bonds

Bond Buyer: – Muni managers unearth secondary market for price discovery. – Some municipal fund managers are finding it’s possible to use the secondary market to help determine fair bond pricing after a drop in new issuance has limited their reliance on the primary market as a benchmark.

WSJ: – Three things people don’t understand about muni bonds. (Subscription required) any people don’t realize the need to understand the tax consequences, safety profile and fees associated with owning municipal bonds.

ETF Guide: – Is a correction coming in the municipal bond market? – Since July, high yield municipal bonds have regained their losses along with the S&P 500, but they also are sporting a large diverging warning sign that the recent highs may be short lived as their uptrend runs out of momentum.

Boston.com: – An investors guide to investing in municipal bonds. – 2014 has been an unexpectedly strong year for municipal bonds. How should investors navigate this robust market? Peter Hayes, BlackRock’s head of municipal bonds, joins Paul Vigna on MoneyBeat with the answer.


Bond Market

Linus Wilson: – Will Tepper tantrum sink the bond bubble? – Hedge fund titan, multi-billionaire David Tepper of Appaloosa Management told Bloomberg, “It’s the beginning of the end of the bond market rally. We are done.”

Monster.com: – Bond buyers open wallets for Wall Street ideas in yield desert. – The bond market has gotten so devoid of yield and volatility, so hard to find anything that hasn’t been picked over by the crowd, that investors are more willing than ever to reward Wall Street for new ideas.

Barron’s: – ECB sends yields lower still. (Subscription required) The European Central Bank is playing catch-up — it’s just starting its bond-buying program as the Federal Reserve winds its quantitative easing down. Now global money will keep Treasury yields low.


Treasury Bonds

WSJ: – U.S. debt gets a boost from abroad. (Subscription required) Stepped-up central-bank intervention in Europe is bolstering the appeal of U.S. Treasury debt among a surprising crowd: bargain hunters.

WSJ: – U.S. Government bonds gain on concerns over Scotland, Ukraine. (Subscription required) Treasury bonds were off to a strong start this week as fresh signs of uneven global economic growth and geopolitical risks in Europe boosted demand for ultrasafe U.S. government debt.

Bloomberg: – Treasuries pare gains before U.S. note, bond auctions. – Treasuries pared gains before the U.S. auctions $61 billion of notes and bonds during three days starting tomorrow.

Stock Traders Daily: – Is it time to buy TBT? – Treasury bonds have been rallying, and although last week saw the first real outflows from Treasury bonds in months, yields are still very low and global demand still seems high. There are two ways of looking at this, one concerns domestic risk, and the other concerns direct comparisons to interest rates in the global marketplace.


Investment Grade

Market Realist: – Overview: Investment-grade bond ETFs. – U.S. investment-grade bonds can provide investors with a safe and steady income stream. They’re issued by the U.S. Department of the Treasury and corporates—for example, blue-chip companies like Comcast (or CMCSA) and Mondelez (or MDLZ). The issuers have a very high ability to service the debt issued. There’s little risk of default.


High Yield Bonds

JC Online: – High yield to benefit from weak jobs number, Draghi’s bond-buying. – The disappointing August jobs report may be troublesome for the economy, but it is positive for high yield investors, said Brian Kloss, portfolio manager for the Legg Mason Brandywine Global High Yield Fund.

S&P Capital: – After holiday lull, high yield bond issuance jumps to $12B. – The U.S. high yield bond market wasted no time getting back to business after a Labor Day break preceded by two weeks without new deal flow.

Paul Chen: – Beware the default rate for high yield. (Registration required) The default rate has historically fared well as a predictor of the credit spread and general economy. These relationships broke down during 2007-09 when the default rate lagged significantly, remaining low while the spread peaked. In the case of another downturn, expect a similar delay in the default rate.

Investment Executive: – High-yield bond covenants continue to deteriorate: Moody’s. – Report finds covenants declined this past year across all high-yield risk categories.

Bloomberg: – Oaktree speaks for mom and pop in rejecting expensive junk bonds. – Oaktree Capital Group LLC’s Howard Marks isn’t alone in being more concerned about losing money in junk securities than missing out on returns by avoiding them.


Emerging Markets

The Globe and Mail: – What does it take to be an emerging markets investor? – You took a trip to faraway lands and bought the T-shirts, but as a do-it-yourself investor, should you also invest in those emerging markets? Probably not if you’re a novice. Unlike buying, say, an ETF based on a Canadian or U.S. index you know reasonably well, you really should know what you’re doing, the experts say.


Catastrophe Bonds

Steve Evans: – The growing popularity of the catastrophe bond variable reset. (Registration required) One of the interesting developments to note in the catastrophe bond and insurance-linked securities (ILS) market in the last couple of years is the growth of sponsor-friendly structures, such as the variable reset.


Investment Strategy

InvestorPlace: – Vanguard Index Funds vs Vanguard ETFs. – With their current pricing structure, Vanguard index funds might be a better choice than their ETF counterparts.

Citywire: – Stewart Cowley: the stupidity of crowds.– One of the reasons why investors get things wrong from time to time is that evidence-based investing, using scientifically and forensically gathered indicators, will suddenly and unpredictably stop working.


Bond Funds

FT: – Bond ETFs’ lure of backdoor to liquidity. (Subscription required) Investors have been piling into bond exchange traded funds at an accelerating pace, lured not only by the search for yield but the promise of liquidity that may be greater than that of the underlying market.

StarTribune: – More mutual fund managers are looking for bonds that help the environment, community. – Instead of lending to just the government or some faceless corporation, what if your bond mutual fund also helped to vaccinate kids around the world? Or helped finance a clean-water project or solar-energy farm?

WSJ: – Mutual funds’ five-star curse. (Subscription required) Take a list of the top-rated mutual funds from years ago—those with five-star ratings from Morningstar Inc. and look at them now. The sobering fact: You’ll see many once-proud, five-star funds have dropped to four stars, three stars or worse. And there are lessons to be learned from that.

Morningstar: – Are discounts and premiums important when selecting CEFs? – Valuation stats make a great starting point for picking a closed-end fund, but additional homework is always necessary.


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