This Week’s Top Bond Market Stories – April 26th Edition

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LearnBonds: – Why does the Fed want to make life more expensive? – Economists should consider honestly debating the merits of the inflationary policies that have left millions of Americans behind, and think about whether changes to those policies might provide more stability over the long run.

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?

LearnBonds: – Should you buy into tempting mortgage REIT yields? – For income investors with a strong stomach and a desire for double digit yields, mortgage REITs, or mREITS for short, pose an enticing proposition. To understand the economics of the mortgage REIT a bit better, take a look the following chart.

LearnBonds: – Debentures – Features, types and benefits. – Debentures are a type of debt instrument that are not secured by specific property or collateral, but are backed by the full faith and credit of the issuer. If the issuer were to liquidate, the debenture holder is considered a general creditor, and has a claim on any assets not specifically pledged to secure other debt. Debentures are frequently issued by large corporations and governments to raise capital.

LearnBonds: – 7 of the most reliable dividend paying stocks. – In this post, I want to make a case for the dividend tortoises instead of the rabbits. I’m talking about seven companies that have such a long history of dividend payments and are so financially solid that they are unlikely to cancel their dividends.


Municipal Bonds

Reuters: – New Jersey leads $8 bln of U.S. muni bond sales next week. – U.S. municipal bond sales will increase to $8 billion next week, led by a $1.16 billion deal from New Jersey’s Economic Development Authority that will help the recently-downgraded state save money on its strained budget.

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.

The Street: – What’s driving the quiet rally in tax-free muni bonds. – Call it a stealth rally in municipal bonds. The asset class often favored by wealthy investors for its tax perks is bouncing back in 2014 despite well-publicized concerns over finances in Detroit and Puerto Rico.

Bloomberg: – Ex-BofA executive avoids jail for muni bond bid-rigging. – A former Bank of America Corp. senior vice president, who cooperated with prosecutors probing a conspiracy to rig bids in the $3.7 trillion municipal bond market, won’t go to jail for his role in the scheme.

Louisville Business First : – The municipal bond market is back. – The municipal bond market is back, and if public projects are going to continue, investors need to snap up munis.

Wealth Management: – How bad is your tax day hangover? – Here is a sobering fact: Investors in the highest tax bracket gave roughly half of their taxable bond investment income to Uncle Sam in the 2013 tax year. By contrast, the 2013 tax rate for tax-exempt municipal bonds (munis) is far more manageable at 0%.

Bloomberg: – Illinois issues $750 million of bonds in third sale of 2014. – Illinois, the lowest-rated U.S. state, issued $750 million of tax-exempt bonds in its third general-obligation sale of 2014.

Businessweek: – Paulson as cheerleader for Puerto Rico plans for wealthy influx. The billionaire hedge-fund manager has bought municipal debt of the commonwealth, invested in its hotels and is building a vacation home in one of its most exclusive resorts. Paulson’s firm is working on 10 real estate deals in the territory known for its low taxes, according to Alberto Baco Bague, secretary of economic development and commerce for Puerto Rico.


Treasury Bonds

ETF Trends: – Don’t bet on Treasuries repeating Q1 performance. – U.S. Treasury debt was something of a surprise performance winner in the first three-and-a-half months of 2014, beating U.S. equities, a performance investors should not necessarily count on being repeated, according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.

The Street: – ‘Fast money’ recap: Watch where bonds are headed. – On CNBC’s “Fast Money” TV show, Guy Adami, managing director of stockmonster.com, pointed out the big reversal in the iShares 20+ Year Treasury Bond ETF (TLT) on Thursday, signaling bond yields may be headed higher. He added that next week’s action in the stock market could be pivotal in deciding its next big move.

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.

Acting Man: – T-Bonds Are Universally Hated, Not a Single Economist Expects an Economic Downturn. – Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now. This is a truly striking result, and given the well-known propensity of mainstream economists to guess wrong (their forecasts largely consist of extrapolating the most recent short term trend), it may provide us with a few insights

Businessweek: – Treasury long bond’s record year-to-date return four times S&P. – A rally in 30-year Treasuries has pushed returns past 10 percent in 2014, the best start to a year in at least two and a half decades.


Investment Grade Bonds

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.

CTS: – U.S. corporate bond chatter: Interest-rate risk back on radar. – A modest wave of new high-grade corporate bond sales landed on the docket Tuesday, while some upbeat economic data helped fuel a positive mood in the U.S. credit market.

Donald van Deventer: – AT&T Inc.: Bond market implications for the dividend yield. – We believe a majority of analysts would rate AT&T Inc. as investment grade, but long run default probabilities are rising steadily.

CTS: – U.S. corporate bond chatter: Supply rises but data dampens mood. – The pace of new investment-grade corporate debt offerings raced into higher gear, as issuers Wednesday continued to take advantage of still-ultra low U.S. interest rates.


Junk Bonds

Market Realist: – Why investment-grade bond issuance last week beat expectations. – Investors willing to take a little higher risk than what they find in Treasuries, if they’re in search of higher returns, can consider investing in investment-grade corporate bonds. In addition to interest rate risk, which also affects Treasury securities, corporate bonds are also subject to credit risk, as their bonds aren’t guaranteed by the U.S. government.

Invesco: – Why today’s environment favors active high-yield strategies. – Fixed income investors are looking for ways to prepare their portfolios for rising interest rates. While bond prices generally fall when rates rise, history shows that high-yield bonds have typically held up well in rising rate environments.

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.

Bloomberg: – Junk loans record inflows halting; How concerned should you be? – What happens when unprecedented flows into the $1.1 trillion junk-loan market stop? Investors may be about to find out.

Federal Reserve: – Understanding aggregate default rates of high yield bonds. – What explains the wide swings in the default rate on high yield bonds in recent years? Differences in credit quality from year to year account for much of the observed variation in default rates, but economic conditions and the “age” of bonds have also played a role.

IFR: – Bonds top loans in leverage debt rivalry. – French cable company Numericable is the latest company raising leveraged debt in the US to boost high-yield bonds at the expense of leveraged loans. The move, which highlights the strength of the bond market, is a blow for loan investors who have been crying out for paper to invest in.


Emerging Markets

FT: – Emerging markets repent of ‘original sin’. – A decade ago, economists often fretted about the so-called “original sin” that plagued emerging markets. During the 1980s and 1990s, countries such as South Korea and Argentina issued vast quantities of bonds denominated in non-domestic, “hard” currencies such as the dollar.

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.

Citywire: – Neuberger Berman unveils EMD blend fund. – Neuberger Berman has launched its fifth emerging market debt fund in little over a year as it continues to extend its reach into the sector.

BusinessDay: – ‘Yellen effect’ still holding for emerging markets. – It seems that what I refer to as the ‘Yellen effect’ is still making investors happy enough to continue holding emerging-market assets and investing in safe havens such as gold.

ETF.com: – 2 Ways to tap emerging debt: EMB Vs. ELD. – Investors have been slowly returning to emerging market debt funds, looking for value opportunities in a segment that was largely shunned in 2013 amid depreciating local currencies and various rate hikes in many of those markets. But when it comes to owning foreign bonds, it makes a difference whether the debt is dollar denominated or not.


Catastrophe Bonds

WSJ: – Investors embrace ‘catastrophe bonds’. – Insurance companies are taking advantage of the appetite for high-yielding debt by selling bonds that can force investors to help pay for the cost.


Investment Strategy

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.

A Wealth of Common Sense: – What’s the worst 10 year return from a 50/50 stock/bond portfolio? – What would the worst 50/50 portfolio of stocks and bonds look like? This sounded like an intriguing idea so I decided to run the numbers.  Here are the results using 10 Year Treasuries as the bond proxy.

Market Realist: – Why are investors less and less attracted to bonds? –  The bond market was spared a hard landing due to the volatile external environment and subdued indicators due to extreme weather conditions during the early part of the year. All that is changing now.

Bloomberg View: – Hunt for exotic yield is dangerous. – Recent credit windfalls, smack of desperation among investors. Tortured by low interest rates, they are snapping up increasingly exotic and risky securities in the hunt for returns in a trend that is quite simply dangerous. Cheap credit is inspiring the same kind of financial creativity that led to the 2008 crisis.


Bond Funds

ValueWalk: – PIMCO bond funds downgraded while commodity program boosted. – As a sign of the times, two of Pimco’s bond funds have been downgraded by Morningstar while its non-bond related fund, the actively managed Commodity Plus Strategy, received an upgrade.

Reuters: – DoubleLine hires PIMCO exec for new bond product team. – DoubleLine Capital, the bond management firm run by Jeffrey Gundlach, on Monday said it had hired an executive from rival Pimco to run a new unit focused on developing new investment products and new lines of business, particularly outside the United States.

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.

Businessweek: – Fidelity reaps rewards as banks lose bond muscle. – While the U.S. Dodd-Frank Act’s Volcker Rule has curtailed the ability of banks to use their own money for trading, the biggest money managers have stepped in, using their growing buying power to absorb at a discount large amounts of bonds that get put up for sale. Those are opportunities that smaller buyers may never see.

HedgeCo.net: – Hedge funds investors return to the bond market, just not to PIMCO. – Liquid alternative mutual funds continue to be the fastest growing segment of the open-end mutual fund industry based on asset flows through March 31, 2014, as reported by Morningstar in their monthly Morningstar Direct U.S. Open-End Asset Flows Update.

Reuters: – Bond funds worldwide attract $3.3 billion over week. – Fund investors worldwide poured $3.3 billion into bond funds in the week ended April 23, marking the seventh straight week of inflows into the funds, data from a Bank of America Merrill Lynch Global Research report showed on Friday.


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