U.S. Energy Junk Bond Warning and Today’s Other Top Stories

AllianceBernstein has warned investors about energy-sector high-yield bonds which have been at the epicenter of recent bond market volatility.

Between late August and mid-November, the US high-yield energy sector is down 6.2%, compared to a 1.7% decline for the broader US high-yield corporate-bond market.

The global asset management firm went on to say: “a surge in capital expenditures and leverage in the energy industry could end badly for some companies and their creditors. While select opportunities exist, we think bond investors should think carefully before they blindly bankroll today’s North American energy revolution.”

So does this volatility represent a buying opportunity? Or is it an indicator of problems to come?

According to Ivan Rudolph-Shabinsky and Petter Stensland, authors of the report. It could spell trouble—at least for many small, highly-leveraged companies involved in oil exploration and production—and that’s reason for investors to tread carefully.

Since 2000, energy companies have invested some $1.5 trillion into operations—mostly exploration and production—and they’ve taken on a hefty share of debt to do it. Debt issued by energy firms today comprises more than 15% of the Barclays US High Yield Index, compared to less than 5% a decade ago.

You can read the full report here.


Todays Other Top Stories

Learn Bonds

Learn Bonds: – Defined-maturity funds – The answer to your bond fund needs. – In light of today’s low-interest-rate environment, I can understand an investor’s reluctance to owning traditional bond funds. After all, if interest rates across the bond universe were to rise significantly, many bond funds would take a noticeable hit. This may scare some investors into avoiding an allocation to bonds altogether. But there is a better solution.


Municipal Bonds

Bloomberg: – The muni meltdown that wasn’t. – Bloomberg’s Joe Mysak looks back at the hysteria that has surrounded municipal bonds over the past several years. Why has this once mundane investment suddenly become front page news?

The Street: – Schwab bond strategist: Strong dollar means it’s time to dump foreign bonds. – As the U.S. dollar continues to appreciate, investors need to know how the strong dollar impacts their assets, particularly in the fixed-income world. So who better to turn to than Charles Schwab’s fixed-income strategist Kathy Jones?

MuniNetGuide: – The great Puerto Rico debt machine gears up, again.  – We are now more than two years into a full-blown debt crisis. And yet, so far, the formula has remained the same: “more taxes and more debt.” After all the market commotion of the past two years, the fact remains that PR’s crippling debt burden has continued to increase, with the Commonwealth being forced to finance its activities at usurious rates and on increasingly onerous terms, while the island’s economy continues to contract.


Bond Market

The Telegraph: – Investors fear bond market ‘meltdown’, study finds. – Investors, traders and analysts are concerned that a lack of liquidity will spark a correction in bond markets.

Chief Investment Officer: – Bond managers ‘averse’ to holding cash despite liquidity fears. – Bond funds have not increased cash holdings despite growing fears of illiquidity in fixed income markets, according to Fitch Ratings.

Bloomberg: – Bond buyers lose easy-money trade as Alibaba disappoints. – Remember when you could predictably pocket millions of dollars by simply winning access to new bond sales?


Treasury Bonds

Reuters: – DoubleLine’s Gundlach says U.S. yield curve to flatten. – Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital, said Monday the U.S. Treasury yield curve could flatten at an “unthinkable” level next year.


Investment Grade

Bloomberg: – Kinder Morgan sells $6 billion of bonds for consolidation. – Kinder Morgan Inc. (KMI) sold $6 billion of notes today to help fund the estimated $44 billion consolidation of its oil-pipeline empire, propelling U.S. corporate-bond sales closer to a new annual record.

Income Investing: – Corporate bond funds not improving their liquidity. – Bond markets have been hit with a pair of pretty major pullbacks over the past four months, but a lot of corporate bond fund managers have not done anything to improve the amount of liquid investments they hold, Fitch Ratings says today.


High Yield Bonds

Business Insider: – There’s trouble in U.S. energy junk bonds. – A surge in capital expenditures and leverage in the energy industry could end badly for some companies and their creditors. While select opportunities exist, we think bond investors should think carefully before they blindly bankroll today’s North American energy revolution.

FT: – Bundesbank warns corporate debt becoming overpriced. – (Subscription) Germany’s central bank has warned corporate debt is becoming overpriced and risks posing a threat to the financial stability of Europe’s largest economy at a time when the European Central Bank is considering buying the bonds.

ETF Trends: – Rate Risk raises liquidity concerns in junk bond ETFs. – If interest rates were to quickly rise, high-yield bond exchange traded fund investors may find it costlier to sell-off their positions as notoriously low liquidity in the speculative-grade debt market could cause problems for the ETFs.


Emerging Markets

FT Adviser: – Managers quell fears of emerging market sell-off. – (Subscription) Fund managers have rushed to allay fears of another emerging markets sell-off, as the dollar strengthens and the US Federal Reserve withdraws quantitative easing (QE).


Catastrophe Bonds

Artemis:  – Japan quake damage thought insufficient to worry catastrophe bonds. – Damage from the magnitude 6.2 earthquake which struck the Nagano region of central Japan on Saturday is not thought to be sufficiently severe to worry any of the exposed Japanese earthquake catastrophe bond transactions, according to the market.


Investment Strategy

Income Investing: – For income, junk bonds beat REITs, utility stocks – BlackRock. – Income-hungry investors have pushed up valuations for just about anything with a coupon in recent months and years. Which of these investments now look the most vulnerable if rates are going to rise, and which should investors continue to target?

Forbes: – Three alternative-income ETFs for sideways markets, rising rates. – Income generation is a perennial investment theme: as younger investors grow old, their growth objective becomes one of capital preservation and income generation. Even growth investors may look towards income when forward market growth forecasts appear sideways at best.


Bond Funds

Income Investing: – Pimco’s Post-Gross outflows only halfway over – Wells Fargo. – The billions of dollars investors have withdrawn from Pimco since Bill Gross left the firm in September may only be halfway finished, with such outflows likely to remain elevated through the middle of next year, Wells Fargo Securities equity analyst Christopher Harris writes.

ETF Trends: – Supply, demand imbalance keep bond ETFs afloat. – With Japan and Europe central banks increasing their debt purchasing programs, global demand for fixed-income assets is set to outpace supply next year, potentially supporting the fixed-income market and keeping U.S. bond exchange traded funds as an attractive option for yield generation.

Bloomberg: – Mutual funds to face new rules as SEC outlines oversight plan. – U.S. regulators may limit how much mutual funds can invest in hard-to-sell assets and use derivatives to boost returns, as concerns mount over firms’ ability to unwind positions in times of financial stress.

Reuters: – Small total return bond funds see record inflows in October. – It is not just the largest bond fund funds that are seeing new investor money in the wake of Bill Gross’ departure from Pacific Investment Management Co.

Focus on Funds: – Vanguard plans active short-duration bond mutual fund. – Vanguard Group is poised to launch an actively managed short-term bond mutual fund in the new year.


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