To get the Best of the Bond Market delivered to your email daily click here.
The Financial Times reports today that long-dated investment-grade corporate bonds are having their moment in the sun, outperforming both junk bonds and equities so far this year. A sign that investors do not expect yields to move sharply higher any time soon.
This runs counter to analysts predictions that U.S. yields, which move inversely to prices, were set to move steadily higher during 2014.
Vivianne Rodrigues and Michael Mackenzie say: The bulk of the gains are coming from longer dated securities as global investors have been lining up in scores to buy a slew of 30-year bonds sold in recent weeks by companies such as Bank of America, General Electric, Walmart, Novartis and Pemex among others.
The story goes on to say that investors have put aside concerns about duration exposure, which measures how sensitive bond prices are to changes in interest rates, as Treasury yields have fallen this year and stocks have been volatile.
Returns for long-term investment grade bonds are 7.48% so far this year according to Barclays data. By comparison, junk bonds have returned just 3.3% so far in 2014, below the overall 3.59% gain seen for the broad U.S. investment grade universe.
The higher returns on long-term debt is good news for institutional investors, such as pension funds and insurers, which have been the biggest buyers of such type of bonds in recent months. They use high-grade, longer-dated securities to match their underlying liabilities.
Todays Other Top Stories
Businessweek: – Bond firm’s gifts to California school officials draw scrutiny. – California’s political watchdog is investigating whether school officials failed to report gifts from municipal bond underwriter Stone & Youngberg, now a unit of Stifel Financial Corp.
Investor Watchdog: – The Puerto Rico municipal bond crisis. – Attorneys believe that Switzerland’s UBS AG exposed its customers to great risk when Puerto Rico’s municipal bond market fell by 19% last year and nearly forced the island to default on its debt.
Bloomberg: – Miami district plans to sell $91 million of bonds in refinancing. – The Midtown Miami Community Development District, the location of a planned Wal-Mart store, is selling $91 million of bonds to refinance debt for a parking garage, roads and other projects.
Bloomberg: – States’ worst start since ’09 shows quest for yield. – U.S. states are engineering a fiscal turnaround, eliminating deficits and logging record tax receipts. Their bonds are still trailing the $3.7 trillion municipal market by the most in five years.
MMA: – Municipal rates withstand other weaker markets. – On Thursday last week, most bond markets began to decline signiﬁcantly, which the municipal market largely ignored. Municipals outperforming other markets has been a major theme in 2014.
LearnBonds: – No shortage of demand for U.S.Treasuries. – With the Fed gradually reining-in stimulus, inflation modest around the globe and sovereign debt trading at low yield levels, what impetus is there for much higher U.S. long-term rates at the present time?
WSJ: – Treasurys eke out gains on lightest volume in 2014. – Treasury bonds eked out slim price gains from the slowest session of the year on Monday as some investors took advantage of last week’s selling to buy debt at cheaper levels.
Reuters: – Most net shorts in long-dated U.S. bonds since May-survey. – The difference between the share of investors who are short longer-dated Treasuries than those who are long increased to its highest level in about 11 months in the latest week, according to a survey released on Tuesday by J.P. Morgan Securities.
Reuters: – U.S. primary dealers buy most 2-year notes since May. – Wall Street’s top bond firms bought the most two-year government notes in 11 months at an auction on Tuesday, which was the first part of this week’s $96 billion coupon-bearing federal debt supply, according to U.S. Treasury data.
About.com: – Why corporate bonds may have limited upside from here. – One result of recent strong corporate bond performance is that the yield spread of the BofA Merrill Lynch US Corporate Master Option-Adjusted Index has declined to 1.16 percentage points, down from 1.28 at the start of the year and the 2013 high of 1.72 set on June 24. Does this mean that the yield spread can’t fall any further? Not necessarily.
Income Investing: – TCW Souring on corporate bonds, favoring mortgages, ABS, CLOs. – Steve Kane of TCW, who manages the $727 million MetWest Unconstrained Fund (MWCIX). Says he’s been cutting back on high yield bonds, and that the risk isn’t so much a torrent of imminent defaults as it is some event that pushes investors into safer havens and shuts down the high-yield issuance market for a while.
Income Investing: – MainStay, MacKay shields remain upbeat on junk bonds. – Have junk bonds entered overvalued territory. Several unconstrained bond-fund managers think they are, and have cut back accordingly. A notable exception Dan Roberts of MacKay Shields, who manages the $1.6 billion MainStay Unconstrained Bond Fund (MASAX), which has roughly half its assets in junk bonds.
Wantin News: – High-yield debt investors bargain hunters beware Minesweeper. – Performance ‘face’ Bond debt plunged nearly 5 percent to nearly a month to pick up high-yield debt market should not blind hunters.
Morningstar: – Unloved emerging markets may hold value for opportunistic bond investors. – Emerging markets have come under pressure over the past year due to the Federal Reserve tapering its asset purchases and increased expectations of higher interest rates in the U.S. We think investors should consider emerging markets to find opportunities that may provide a yield advantage and diversification away from U.S. interest-rate risk. A multisector approach that uses bottom-up, fundamental credit analysis may be helpful in finding opportunities in emerging markets.
Morningstar: – 3 Opportunities in the global bond markets. – Consumer cyclical companies’ bonds, trades between Europe and the UK’s government debt, and the US municipals market are all opportunities, says Schroders’ Gareth Isaac.
Russ Koesterich: – Spring check-up: 5 investment ideas for your portfolio. – Since my colleagues and I put out our 2014 outlook late last year, much has changed and the economic backdrop has shifted.
Donald van Deventer: – The 20 best value bond trades with maturities from 1 to 5 years. – We use those default probabilities to rank the 20 best bond trades on April 17 with maturities between 1 and 5 years. The best trades were issued by United Technologies, Simon Property Group, Goldman Sachs, International Lease Finance Corporation, and Pepsico.
Wealth Management: – You’re going about asset allocation all wrong. – Many advisors who grew up in this industry were taught to look at asset allocation in a pretty standard way: What’s the client’s risk tolerance? And based on that, how much exposure should they have to stocks? To bonds? Should we mix in some less correlated asset classes such as commodities and real estate in case the stock market gets volatile?
Investment News: – Fund outflows could give Pimco headaches, Morningstar says. – Outflows aren’t just damaging to the ego of fund managers, they also can make it harder for them to do their jobs. And that fact could be important to watch at Pimco, according to Morningstar Inc.
Reuters: – Pimco global multi-asset, foreign bond funds hit with sharp outflows. – The Pimco Global Multi-Asset (PGAIX), Pimco Foreign Bond (PFUIX) and Pimco Investment Grade Corporate Bond (PIGIX) funds are suffering the heaviest net outflows over the trailing one-year period through March 31 among U.S.-domiciled Pimco funds rated by Morningstar Inc., data showed on Monday.
Morningstar: – A spotlight on world-bond funds. – The world-bond category has been one of the fastest-growing fixed-income groups in recent years, both in terms of assets and the number of offerings. Over the past five years, it attracted a lot of new money, ranking fifth after the nontraditional, bank loan, short-term, and ultrashort categories in terms of inflows.
Bloomberg Muni Brief has ranking of cities with highest income inequality. Had to chuckle that Berkeley, CA is ranked 10th.
— Bond Girl (@munilass) April 22, 2014
bored. very. bored. maybe I’ll place a few risky trades based on nothing.
— Hello, Janet. (@cr3dit) April 22, 2014
Unions are trying to force the Port Authority to backstop funding for a private building when 1st two are not leased. Bad #muniland juju.
— Cate Long (@cate_long) April 22, 2014