This Week’s Top Bond Market Stories – January 25th Edition

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LearnBonds: – Risk Tolerance – What every investor should know. – Risk and return potential are fundamentally linked. Lower risk will have a lower possible return, while higher risk will have a higher potential for return. Investors often consider the link between risk and return to be a spectrum: on the left side are low risk investments, and on the right side higher-risk investments. The higher the risk of an investment, the higher the potential return from that investment…

LearnBonds: – Disinflation and deflation are on the table. – Over the past two weeks or so, the words deflation and disinflation have popped up quite frequently in the news. Deflation is a situation in which prices are falling in absolute terms. Disinflation is a situation in which prices are rising but the rate at which they rise, the rate of inflation, is falling.

LearnBonds: – Navigating the depths of junk bonds. – Last week, we examined the landscape for near-investment-grade bonds, specifically those rated BB or BB+ by S&P. Although technically considered junk, we discussed how BB rated companies may have solid business models with near-term issues or an over leveraged balance sheet. Today I’d like to extend the discussion of yields and strategy within the high-yield space, this time examining full fledged junk debt with credit ratings of ‘B’ and below, as rated by Standard & Poors.

LearnBonds: – Janet Yellen and a “true shift” in Fed policy. – In the January 20, 2014 issue of Time (magazine), Rana Foroohar shares details of an interview with Janet Yellen, the soon-to-be new chair of the Board of Governors of the Federal Reserve System. The article includes several tidbits worth discussing.


Municipal Bonds

Bernardi Securities: – 2013 Municipal Bonds Wēijī: Does crisis equal 2014 opportunity? – The municipal bond market’s behavior in 2013 could be summed up by the old saying that the Chinese word for “crisis” – wēijī – is actually composed of two characters representing “danger” and “opportunity.” John F. Kennedy is credited for popularizing this concept in a 1959 speech, and it has since become a staple of motivational speakers looking to inspire their audiences to seize the opportunities that appear in the midst of uncertain times.

ETF Trends: – Muni nation: Shorten up for rising rates. – This past Tuesday Market Vectors® launched SHYD, Short High-Yield Municipal Index ETF. SHYD seeks to track an index that only includes bonds with 1-10 years until maturity. The focus on this maturity range has generally meant lower duration  — or sensitivity to changes in interest rates — and yields competitive with those of an all-maturity high yield municipal bond index. Less rate sensitivity has generally meant less of a negative impact on total return during periods of rising interest rates.

Reuters: – White House not considering Puerto Rico bailout, official says. – The White House is not considering a financial bailout for Puerto Rico, where chronic fiscal challenges have raised the specter of a Detroit-like bankruptcy, an Obama administration official said on Wednesday.

ETF Strategy: – Market Vectors launches short duration high-yield municipal bond ETF. – Market Vectors, the exchange-traded funds brand of Van Eck, has announced the launch of the Market Vectors Short High-Yield Municipal Index ETF, an NYSE Arca-listed ETF providing exposure to the shorter end of the municipal yield curve.

Bond Buyer: – Bond insurance stalls in post-crisis low. – Municipal bond insurance fell to the lowest level since the financial crisis last year as issuance slumped. The guarantors’ market penetration began to rise.

Bloomberg: – Smart money wants mediocre BBB instead of top grade. – Investors are pouring the most money since September into the riskiest U.S. local debt, a boon to lower-rated issuers such as Puerto Rico that plan to borrow in the $3.7 trillion municipal market in coming weeks.

MarketWatch: – S&P capital IQ to explore municipal bond ETFs during its next “ETF analyst hour”. – JR Rieger of S&P Dow Jones Indices and Todd Rosenbluth of S&P Capital IQ will discuss the municipal bond industry and issues affecting municipal bond ETFs.

Income Investing: – Newly issued in the muni market: Some optimism. – The muni market spent much of 2013 under a black cloud of Detroit’s bankruptcy and Puerto Rico’s fiscal woes and rising interest rates and generally and miserable performance. But things are looking up! Yesterday Lipper reported that muni-bond mutual funds and ETFs recorded their first net weekly inflow since last May, snapping a streak of 33 straight weekly outflows.

Cate Long: – Is it time to replace Detroit’s emergency manager? – From the outside, it appears that Orr has been handling this process like a corporate bankruptcy, where quick and decisive moves rule the outcome. In contrast, municipal bankruptcies involve retirees with broad legal rights, creditors with various levels of seniority and a large overhang of public opinion. Now Jones, Day is trying to organize creditors ahead of a possible Puerto Rico bankruptcy. I think it may be time for Michigan governor Rick Snyder to think about replacing Orr and possibly his  former law firm Jones, Day as Detroit proceeds through its bankruptcy.



Investors Chronicle: – Back to bond basics. – The relentless focus on credit risk in the bond market can be a bit abstruse for ordinary investors, who generally prefer the tales of fabulous growth to come that tends to dominate the discourse around equities. However, the bond market this year will probably be the object of greatest interest because the expected shift in yields, and the consequent release of cash, will profoundly affect the overall market.

StarTribune: – A primer on bonds, interest rates and bond ladders. – What are the benefits of owning a bond fund or individual bonds? How does one determine if Treasury, municipal, corporate, inflation or international bonds are the best fit for your portfolio? If we want to buy a ladder of individual bonds, how do we find someone to help us and how much would we expect that to cost?

AdvisorShares: – Bonds and rates. – Right now the topic de jour in the fixed income space is interest rate risk. The traditional thought is that as interest rates rise, bond prices fall. But looking at history, the high yield market has defied this widely held notion. Let’s examine the four main reasons why high yield bonds have historically performed well during times of rising interest rates.


Treasury Bonds

FT AlphaVille: – Inflated worries, part 2 — a different look at the labour-market slack conundrum. – The bond market is just trying to anticipate the Fed, not actually fight it for control of the yield curve.

Investorplace: – Exploit the boom in Treasury bonds. – Don’t look now, but one of the world’s most hated asset classes is making a comeback. That’s right. The seemingly inevitable decline in Treasury bonds — and, by extension, the popular iShares 20+ Year Treasury Bond ETF (TLT) — has been interrupted.

WSJ: – Next cut in Fed bond buys looms. – The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.

Citywire: – Kames bond veterans shy away from five-year US treasuries. – Kames Strategic Global Bond managers Philip Milburn and David Roberts have warned that five-year US government bonds (Treasuries) look vulnerable to even the hint of US interest rate hikes later this year.

Investing.com: – US 10 year Treasury note speculators decrease bearish positions. – 10 Year Treasuries: Large futures market traders sharply decreased their overall bearish positions in the 10-year treasury note futures last week to the lowest level since October, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday.


Investment Grade Bonds

Bloomberg: – Credit swaps in U.S. rise to five-week high; Textron sells bonds. – A measure of U.S. company credit risk climbed to the highest level in more than five weeks after a gauge of China’s manufacturing contracted. Textron Inc. (TXT) sold $600 million of bonds.



Professional Adviser: – Is this the fixed income market’s bright spot? – High yield offers the best potential in bonds but careful stock selection is key to hunting down the compelling returns available. Rayner Spencer Mills’ Ken Rayner explains.

WSJ: – Mergers could clog flow of junk bonds. – Investors’ healthy appetite for junk bonds may be tested in coming months if two supersize corporate takeovers take place.

ValueWalk: – HY corporate bonds running hot. – SocGen analysts Sebastien Lemaire and Laure Genet provide insights into European market sentiment through the medium of fund flows into and out of European ETFs in their research note ‘ETF Market Signals.’

FT: – ArcelorMittal’s early hybrid repayment sounds warning. – ArcelorMittal sounded a warning shot to investors in hybrid corporate bonds on Tuesday when it announced plans to repay $650m of high-yield debt less than 18 months after it was issued.

Bret Jensen: – Getting high yield at good values. – Real Estate Investment Trusts (REITs) had a very tough back half of 2013. Interest rates rose significantly after the Federal Reserve started to seriously talk about the “Taper” in late May. In addition, investors preferred high growth equities within the market’s ~30% rally of the just completed year.

ETF Database: – ETF Insider: High-yield prospects January 19th edition. – Here is a look at ETFs that currently offer attractive income opportunities. The high-yield candidates included in this list meet two sets of criteria. First, each of these funds is deemed to be a high yield prospect because it boasts an annual dividend yield upwards of 5%.


Investment Strategy

Gary Jakacky: – Leveraged bond ETFs: No evidence of volatility drag. – In previous articles I have analyzed leveraged and inverse stock ETFs to examine how well they tracked their underlying index. Since these articles appeared over 15 months ago, I will update some of this analysis in the near future.

FT: – Turning back to the Great Rotation theme. – Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, remains “committed to the Great Rotation theme”.

iShares Blog: – During times of financial stress: buy bonds. – For investors who are worried about a correction, Russ provides a look at which traditional safe-haven assets tend to perform best during times of uncertainty.


Emerging Markets

Financial Post: – Finding a sweet spot in EM bonds. – Mike Reed believes there is a compelling growth story to be found in emerging markets as part of a broader opportunity for convertible bonds.

ETF Trends: – Emerging markets: Badness is happening right now. – Emerging markets stocks and exchange traded funds, many of which notched dismal performances last year, are offering up sequels to those unfortunate performances. Abundant are the anecdotes that illustrate just how ugly emerging markets ETFs have been to start 2014.

FT: – China slowdown weighs on emerging markets. – The year of the horse is approaching in China, which explains perhaps why there are not many bulls around Asia and other emerging markets.

Barron’s: – The best mutual funds for emerging markets. – Emerging markets, which had a disappointing 2013, were a big theme of the Barron’s Roundtable this year. While our participants may be divided as to the near-term prospects for the world’s developing nations, everyone agrees that investors need to participate in the long term.


Catastrophe Bonds

Artemis: – Catastrophe bonds replace high-yield bonds for financial advisor. – Catastrophe bonds, as a fixed income investment which currently offer higher yields than many so-called high-yielding bonds, are replacing more traditional sources of yield for one financial advisors clients.


Bond Funds

IndexUniverse: – Sage’s Smith: ETFs for shifting scenarios. – The consensus among market strategists predicts 2014 will continue along the trajectory that was established in the second half of last year; namely, modest but gradually improving U.S. and global economic growth rates with tame inflation. In other words, we can reasonably expect economic conditions that are not too hot and not too cold, but just right. But what if this “Goldilocks” scenario doesn’t play out as scripted?

Andrew Thrasher: – The bond chart I’m watching right now. – Bonds have begun to come back to life in 2014 as traders began to realize that the Federal Reserve pulling back on its bond buying program is not the end of the world and that sentiment towards bonds is at record lows. I began getting interested in the bond chart back in September when the Barclay’s Aggregate Bond Index was holding support and seeing bullish internals. I’ve also been discussing the range the 10-year Treasury yield has been in with resistance at 3% in my weekly Technical Market Outlook.

New York Times: – Investors seek yields in Europe, but analysts warn of risk. – When Ireland recently made its first offering of new debt since leaving its bailout program, the Irish prime minister, Enda Kenny, was already focused on where the money would come from next.

MoneyNews: – A funny thing happened on the way to the bond rout. – The economic recovery powered by the Federal Reserve’s bond-purchase program was expected to prompt rising yields that would crush bond values, because prices of fixed-income securities generally fall as yields rise. Many pundits predicted investors would bail out of bonds and jump into stocks, which were expected to offer much better returns, in what some called a “great rotation.”

Green Faucet: – Against the herd: Lower rates rather than higher rates in 2014. – Bloomberg News surveyed banks and securities companies on where the 10-year Treasury yield would finish 2014. Economist forecasts averaged 3.41%. With 2013 closing near 3.01%, perceived strength in the underlying U.S. economy, and the Federal Reserve reining in its controversial bond buying program (”QE3″), the predictions are hardly outlandish.

ETF Daily News: – AdvisorShares launches new low duration bond ETF. – Thanks to the QE taper and rising bond yields, many in the fixed income world have been hit hard. 2013 was the first year in quite some time that losses were seen in bond portfolios, leading some to abandon the space, or at least focus on lower duration securities.

Financial Chronicle: – MFs leave investors spoilt for choice with new equity funds. – Equity mutual fund launches have flooded the industry in the last one month with investors spoilt for choice, as fund houses are vying for money at a time when equity as an asset class is looking better than debt in terms of return prospects.

WSJ: – And the next star fund manager is? – Finding a mutual-fund manager who can beat the market is tough. Winners flame out. Losers revive. The resurgent losers flame out again. No wonder low-cost index-based exchange-traded funds and mutual funds—which seek only to mimic the return of a designated slice of the market—have eclipsed actively managed funds as the investment of choice for private investors.

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