This Week’s Top Bond Market Stories – January 4th Edition

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LearnBonds: – Bonds and younger investors (Are bonds for kids?) – There is some debate within the investment community about whether bonds are a wise investment for children and young adults. The choice of whether bonds are the correct type of investment needs to be based on the personal and financial situation of the investor, as well as the investor’s intended use for the money down the line.

LearnBonds: – The biggest market risk for 2014. – What is the biggest market risk of 2014? John Mason takes a look at what could go wrong with the bond market in 2014.

LearnBonds: – Individual bonds – A must own allocation for your portfolio. – If we live in a world in which most, if not all, asset classes are being propped up by central-bank liquidity, then I want to own the one asset that I know will protect my principal and make planning for the future an easier task.


Municipal Bonds

Bloomberg: – Morgan Stanley to Barclays see second yearly muni losses. – State and local bonds are set for their first back-to-back annual losses in more than three decades after the $3.7 trillion U.S. municipal market suffered its worst year since 2008.

Forbes: – How could a Puerto Rico default hammer the $3.7 trillion U.S. muni-bond market in 2014? – As we head into 2014, you may be asking why we are concerned about a small island located in the Caribbean Sea, about a thousand miles southeast of Miami. Geographically, it is a mere speck on the map… practically irrelevant. In fact, 70 islands the size of Puerto Rico could fit comfortably into the state of Texas. However, the debt burden currently burying this economy may eventually send nasty tremors into the United States’ municipal bond market.

WSJ: – Yields on Puerto Rico debt hit high. – Puerto Rico is struggling to convince investors and credit-rating firms that it is on the path to financial health amid rising borrowing costs and fears over a potential downgrade of its debt.

New York Life: – Top five municipal market insights for 2014. – 2014 should bring: Lower issuance. Net negative supply. Increased demand and increased taxes, hitting taxpayers in April, and still not priced into the market. Along with increased insurance company demand for attractive yielding investments.

Bloomberg: – Tax break’s escape might lessen pressure to sell. – For the $3.7 trillion municipal bond market, Washington’s political divide may be a good thing.

Bouchey Financial: – Expectation for muni bonds in 2014. – This past year was a tough one for municipal bond investors with the Barclay’s Muni Bond Index posting its worst performance in the past 20 years.  This negative performance was driven in part by the high profile bankruptcy of Detroit and the issues related to cash strapped Puerto Rico.  Municipal bonds were also negatively impacted by rising interest rates driven by the Fed’s announcement in May that they would start tapering their monthly bond purchases.

ETF Trends: – Problems mount for muni bond investors. – Exacerbated by Detroit’s bankruptcy filing, Illinois’ unfunded pension obligations and Puerto Rico distress, municipal bond exchange traded funds were battered as rates steadily rose since the start of May.

Advice IQ: – Pension woes & muni bonds. – Most public pension funds are significantly underfunded when their liabilities are valued using economically reasonable assumptions. In fact, the Pew Trust estimated that total underfunding was roughly $1.4 trillion as of 2010. That means the total value of pension fund assets is roughly $1.4 trillion less than the amount these funds owe to current and future retirees.


Treasury Bonds

Bloomberg: – Treasury yields drop from 2-year high as investors weigh outlook. – Treasury 10-year yields fell from the highest level in more than two years as investors speculated whether the U.S. economy will improve enough for the Federal Reserve to end bond purchases in 2014.

Jay on the Markets: – Bonds are to fear early in the year. – The treasury bond market has showed a strong seasonal tendency to perform poorly during the early part of the year.  People often ask me “why” this would be so.  In fact I get that question often enough to make me wish I had a good answer.  Alas, as a proud graduate of “The School of Whatever Works”, I can only repeat our school motto, which is “Whatever!”

ZeroHedge: – Bonds close 2013 at 30-month high yields. – The Treasury bond has now closed for 2013 with the (highest duration) 30Y Treasury Future down 13% for the year. Of course, those invested in fixed income are not all long the long-end but across the whole complex yields are at highs.

Reuters: – U.S. yields finish year near 2-1/2-year high. – U.S. 10-year Treasury yields ended 2013 near their 2-1/2-year high on Tuesday, capping the third worst year for U.S. government debt in four decades, according to Barclays data.

WSJ: – U.S. Treasury prices fall, closing out a losing year. – Prices of U.S. Treasury bonds fell in the last trading session of 2013 as the latest housing and consumer reports brightened the economic outlook, and were poised for the biggest annual loss in five years. The world’s largest sovereign-debt market has handed investors a loss of 2.6% this year through Monday in total return, the biggest since 2009, according to Barclays.

ETF Trends: – Inverse Treasury ETFs thrive as rates soar. – As yields on benchmark 10-year Treasuries touch a two-year high, more investors are beginning to understand the potential negative effects of rising rates in their bond portfolios. Nevertheless, there are a number of inverse exchange traded funds that can hedge against misfortunes in the Treasury market.


Investment Grade Bonds

Bloomberg: – Credit swaps hold in U.S. as bond spreads reach lowest since ’07. – A gauge of U.S. corporate credit risk held at about the lowest level in six years as relative yields on investment-grade debt fell to the least since 2007.

Fundweb: – Corporate bonds move into 2014 with an uncertain future. – Quantitative easing has made corporate bonds a boon for investors but its slowdown in 2014 will bring increased volatility and greater chance of defaults.

WSJ: – Companies sell record $1.111 trillion of bonds in 2013. – Highly rated companies sold a record $1.111 trillion of bonds in the U.S. in 2013, even as the debt offered the worst returns in five years.



FT: – 2014 outlook: Sugar high. – ‘Credit Cassandras’ say strong demand for risky bonds is a sign of frothy markets.

WSJ: – Long-term junk bonds fall out of favor. – Rising interest rates are driving investors toward shorter-term securities. And that means that issuers trying to lock in cash for longer periods are facing a tougher sell, the WSJ’s Katy Burne and Mike Cherney write.

Kiplinger: – 5 Types of income investments that should shine in 2014. – Here are five income categories that should continue to perform well in 2014.


Emerging Markets

Reuters: – Funds shrug off default risk in dash for emerging company bonds. – When Brazilian oil firm OGX tried to tap bond markets for $2 billion in 2011, investors were ready to hand it $5.5 billion. Two years on, OGX is in default and the debt trades at less than 10 cents of its original face value.

InvestorPlace: – The best emerging market bond ETF you’ve never heard of. – Even with Fed beginning its much ballyhooed taper, interest rates are still in the basement. And they’re likely to stay relatively low for quite some time. That news has sent investors into all-sorts of different types of bonds and asset classes looking for yield. Emerging market bonds and debt have become one of the most popular stopping points as investors look to expand their options. That is, unless you’re the Market Vectors Latin American Aggregate Bond ETF (BONO).

Reuters: – Funds shrug off default risk in dash for emerging company bonds. – When Brazilian oil firm OGX tried to tap bond markets for $2 billion in 2011, investors were ready to hand it $5.5 billion. Two years on, OGX is in default and the debt trades at less than 10 cents of its original face value.

WSJ: – Unusual emerging-market bond bet pays off. – For most emerging-markets investors, 2013 was a year to forget. The beginning of the end of the U.S. Federal Reserve’s giant stimulus program sucked money out of risky assets. The J.P. Morgan Emerging Market Bond Index has lost more than 5%, its worst performance in half a decade. But a handful of fund managers bucked the trend, with some unusual strategies.

FT: – A tougher year for emerging markets. – Since the financial crisis, the global economy has travelled at two speeds. Developing countries have steamed ahead, powered by China’s voracious appetite for raw materials. Meanwhile, the west has limped along, as households and states cut back spending to address towering debts.


Catastrophe Bonds

FT: – Insurers make leap in cutting overheads. – A historic change in the way insurance companies protect themselves against natural catastrophes has helped the industry secure the biggest drop in reinsurance prices in 15 years.

Royal Gazette: – A storm that would wipe out more than half of cat bond principal. – More than half of the money invested in catastrophe bonds could be wiped out by a single hurricane, according to catastrophe modelling experts AIR Worldwide.


Bond Funds

Bloomberg: – Gross’s mistake on Fed taper echoes across Pimco funds. – Bill Gross, the money manager known as “The Bond King,” misjudged the timing and impact of the Federal Reserve’s plan to scale back its asset purchases in 2013, spurring the Pimco Total Return Fund (PTTRX) biggest decline in almost two decades.

NewsObserver: – Bond market’s changes are going unnoticed. – While the remarkable gains of the stock market in 2013 garnered deserved attention at the end of the year, something else was happening in the much larger bond market.

Larry Swedroe: – Sell, don’t buy, floating-rate note funds. –  Every time interest rates are low, investors begin to make mistakes – engaging in activities that they otherwise wouldn’t undertake – such as stretching for yield by taking on credit risk – if rates were at more “normal” levels like 4 or 5 percent. With Treasury yields having been at extremely low levels for several years now, and money market accounts paying virtually nothing, many investors haven’t been able to resist the siren call of higher yields, especially if they can get them without taking term risk (the risk of rising interest rates). Unfortunately, they often forget that yield and return aren’t synonymous.

Motley Fool: – The “Great Divergence” between stocks, bonds, and gold. – In a fitting tribute to the strength and consistency of this year’s bull market, both the S&P 500 and the narrower Dow Jones Industrial Average closed out 2013 at all-time highs, with annual price returns of 29.6% and 26.5%, respectively. The surge in stock prices has been broad-based, too – the small-cap Russell 2000 index put up even better numbers, rising 37% (it also closed at a record high on Tuesday.) For the S&P 500, that is the benchmark index’s best performance since 1997; from its financial crisis closing low on March 9, 2009, it has now risen 173%.

Reuters: – Mortgage bonds reward yield-sensitive investors. –  Investors searching for higher yields from rock-solid investments were put on hold again last week by the Federal Reserve, which pledged to keep interest rates low even as it scales back its extraordinary monetary easing.

USA Today: – Bond funds give investors a lump of coal in 2013. – Most bond investors got a lump of coal this year, and that may be just a taste of what’s to come in 2014.

New York Times: – Reading between the lines of 2013’s big stories. – When we see a story in the news repeatedly, we have a tendency to think it must be important. Thinking something is important often means we feel we should do something about it. This year, there were a lot of catchy headlines in the financial news, and most of them represented little more than noise. There were, however, a few important themes in 2013 that may affect your financial plan as we head into 2014.

Bloomberg: – Stocks $3.7 trillion year beats bonds most ever on funds. – Five years after the equity bull market started, U.S. investors returned to stocks in 2013, just in time for the best relative returns versus bonds on record.

Philly.com: – Your Money: Fed’s bond tapering good news for investors. – Investors should celebrate that the Federal Reserve is finally getting out of the investment business. Why? Because it provides some certainty.


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