This Week’s Top Bond Market Stories – May 3rd EditionAuthor: Adam GreenLast Updated: May 27, 2020 To get the Best of the Bond Market delivered to your email daily click here.LearnBondsLearnBonds: – Are you a bond investment activist or pacifist? – One of the basic decisions one faces when building and managing a bond or stock portfolio, is whether an active or a more passive strategy should be employed. Though there is certainly no right or wrong way to invest in bonds, the pros and cons of passivity versus activity should be weighed before engaging the space.LearnBonds: – Why the Fed should reconsider its inflationary policy. – The willingness and ability of consumers and corporations to take on ever increasing amounts of debt is an essential piece of today’s fiat monetary system. Therefore, I can only imagine the concern of those in power, when they see the sluggish growth in revolving credit during the post-financial-crisis years.LearnBonds: – Interest Rate Swap – Definition and example. – An interest rate swap is a financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount, over an agreed period of time. Interest rate swaps provide a way for businesses to limit or manage exposure to fluctuations in interest rates.LearnBonds: – Third round of quantitative easing – $10 billion. – The Federal Reserve announced on Wednesday, April 30, 2014, that it was going to reduce the amount of securities it purchased every month as a part of its third round of Quantitative Easing by another $10 billion. This means that over the next month the Fed will only buy $45 billion in securities.LearnBonds: – Bond investors should think preferred stocks for generous yields. – Looking for decent yields? You’re not going to find them in the bond market, with 10-year Treasuries well under 3% and 10-year triple-A rated corporates a little over 3%. But you can find them – if you know where to look. Municipal BondsReuters: – Muni bond issuance drops to $5 bln next week. – U.S. municipal bond sales will drop to $5 billion next week, down from around $8 billion this week, according to Thomson Reuters estimates on Friday.Bloomberg: – Stanford University to tap muni rally with $410 million of bonds. – Stanford University, with the fourth-richest endowment among U.S. schools, plans to tap the municipal market with $410 million of top-rated, tax-exempt debt as soon as this week as benchmark yields set 10-month lows.Investment News: – Navigating the global fixed income waters when interest rates are rising. – The environment is turning for municipal bonds, where opportunities are emerging. With the Federal Reserve gradually tapering its quantitative-easing program, interest rates will eventually rise from the historic lows fixed-income investors have become accustomed to in recent years. As advisers look to restructure their investors’ fixed-income portfolios in light of this changing environment, they should consider the municipal bond sector, which currently offers one of the most compelling value-investing opportunities in the fixed-income markets.Montrose Daily Press: – Watch for different risk levels of “muni” bonds. – Are you thinking of investing in municipal bonds? — although some “munis” are subject to the alternative minimum tax. However, since not all municipal bonds are the same, you’ll want to know the differences — especially in terms of risk.Bloomberg: – Puerto Rico debt rallies on budget that avoids borrowing. – Prices on Puerto Rico’s junk-rated debt rose to the highest in almost three weeks after an official said Governor Alejandro Garcia Padilla plans to balance the next budget without deficit financing.Businessweek: – Muni bonds shower investors with biggest April gains since 2011. – The $3.7 trillion municipal market is set for its best April gain in three years, extending a 2014 rally that has outpaced stocks, Treasuries and corporate debt.EatonVance: – Muni bonds’ appeal likely to be evident in 2014. – 2013 proved to be a difficult year for the municipal bond market with a few, high-profile negative news stories and fears that Fed actions could lead to higher interest rates. But 2014 may offer a more promising scenario. Higher tax rates, in particular, are likely to cause more investors to consider the appeal of investing in tax-advantaged bonds. Treasury BondsETF Trends: – Renewed demand for Treasuries props up bond ETFs. – U.S. banks are hoarding Treasuries in response to new liquidity rules, bolstering Treasury bonds and related exchange traded funds.Zerohedge: – Goldman Sachs strongly suggests clients sell them their Treasury bonds. – Goldman Sachs says there is a slow awakening of Treasury bears and recommends shifting from a neutral to short-duration position in bonds… one can’t help but wonder just what the bank will do with all the bonds clients sell to them.WSJ: – Treasury bonds fall on strong housing data. – Treasury bond prices fell for the first time in four sessions Monday as a strong U.S. housing report dented the allure of safe-haven bonds.WSJ: – Treasurys hold gains after Fed decision. – Treasury bonds held gains Wednesday after the Federal Reserve decided to reduce its monthly bond purchases to $45 billion, as expected.WSJ: – Treasury bonds rebound; 10-year yield hits 3-month low. – Treasury bonds strengthened, erasing earlier losses, as worries about growing geopolitical tensions in Ukraine prompted demand for haven assets. Investment Grade BondsFT: – Apple prepares for $17bn jumbo bond sale. – Apple is preparing the groundwork for another blockbuster debt sale in the region of $17bn that could rank as the second-largest corporate bond sale of all time. The world’s most valuable company said last week that it planned to increase its share buyback from $60bn to $90bn, funded by domestic and international bond sales.IFR Asia: – Orders pour in for Apple’s US$12bn bond offering. – Investors rushed on Tuesday to get a piece of Apple’s new US$12bn seven-part bond deal, just the company’s second foray into the US bond market.FT: – Apple bonds rise on first trading day. – Apple bonds rose in their first full day of trading in secondary markets, rewarding investors who bought $12bn worth of the securities at attractive prices in the largest corporate debt sale so far this year.Indexology: – A Comparison of two corporate bond markets. – The possibility of interest rates remaining low means investors will continue to search for yield while also looking to diversify market exposures. Below we offer a snapshot of two corporate bond landscapes: the U.S. corporate bond market and the Chinese corporate bond market, which has expanded rapidly in recent years. Junk BondsIncome Investing: – Barclays boosts 2014 junk-bond return forecast to 6%. – Barclays took a look at a junk-bond market that’s already returned 3.5% so far in 2014 and decided it’s a good time to revise it’s 3.5% full-year return forecast. Coming into the year, Barclays predicted junk bonds would return between 3% and 4%, which would have meant underperforming the market average yield of 5.67% back on Jan. 1.Global News on Invest: – Junk bond fever hits new high. – Companies with low credit ratings learned a valuable lesson this week: investors will queue up to lend to them, and expect relatively little in return.Bloomberg: – Junk-bond skeptics squeezed as JPMorgan sees tears in ’15. – It’s a painful time to be a junk-bond skeptic. It may seem inevitable that the riskiest corporate debt will lose value, since investors are getting paid about the least ever to own such bonds. Yet after bearish wagers on the biggest junk-bond exchange-traded funds surged to a record last month, the market just keeps on rallying.Blanchard: – Two Harvard professors link low quality issuance to imminent credit crises. – Below-investment-grade companies have been rushing to cash in on 2014’s still low rates, this year so far raising $157 billion of junk bonds worldwide, according to Dealogic. That included an $11 billion junk bond offering for French cable operator Numericable Group, the largest ever. The flood of junk issuance is troubling, according to two Harvard professors – Robin Greenwood and Samuel G. Hanson.Income Investing: – Junk-bond default rate will double after TXU Bankruptcy filing. – In the most long-anticipated bankruptcy filing in years, Energy Future Holdings Company finally threw in the towel today and filed for Chapter 11 bankruptcy protection in Delaware. Because of the the firm’s outsize debt burden and oversized footprint in the junk-bond and bank-loan markets, its bankruptcy filing will cause the junk-bond default rate to double, according to Fitch Ratings.Wall St Daily: – Credit markets flashing danger signs. – Demand for junk bonds is soaring, as persistently low rates boost the appeal of higher-yielding (and riskier) debt. Another disturbing trend is the rise in covenant-lite loan issuance. Regular, high-yield loans force borrowers to maintain their debt below certain ratios of cash flow, but covenant-lite loans come with less stringent restrictions.Invesco: – Why high yield investors should look past high dollar prices. – Conventional wisdom says if bonds are trading at a discount to par value, buy. If they are trading over par value, don’t. Over the past three years, the high yield market has experienced above-par prices, leading some investors to avoid the asset class. However, high yield bonds don’t always perform according to conventional wisdom. They include call protection, which may generate returns for investors even when the market is trading above par. Emerging MarketsETF Trends: – After S&P downgrade, consider ETFs with Russian bonds. – Last Friday, equity-based Russian exchange traded funds, fell to their lowest levels in five weeks after Standard & Poor’s lowered its rating on Russian sovereign debt to BBB-, the lowest investment grade. Russian ETFs now offer a great value opportunity with Russian bonds rating just one level above junk status and on par with more fiscally challenged Brazil.Larry Cao, CFA: – What makes emerging market debt tick? – Asset allocators and wealth managers are always on the lookout for new asset classes, or beta opportunities, as a way to enhance portfolio risk and return. The ideal beta opportunities are those that offer high return, low risk, and low correlation with other assets in the portfolio. Over the last decade, emerging market debt as a group seems to have done just that, so no surprise then that it started gaining popularity as a fixed-income asset class in recent years.Investing.com: – 5 Reasons to now choose local vs. foreign emerging market debt. – In the current state of gradual and uneven recovery of EM assets, we favour a rotation from foreign to local currency fixed income instruments in many emerging markets, especially in countries where the interest rate cycles are peaking.WSJ: – Individual investors look to the ‘frontier’ in quest for returns. – Wanted: small investors willing to commit part of their savings to less-developed countries with fast-growing economies and the potential for big returns.Reuters: – Investors pick dollar debt for emerging market re-entry. – Investors dipping their toes back into emerging markets are choosing hard currency debt which, thanks to rich yields and expectations for a stronger dollar, is the developing world’s best performing asset class this year. Catastrophe BondsFT: – Investors place bet on insurers’ catastrophe bonds. – Yield-starved investors are gambling that mother nature will be kind this year as they flock to a risky type of insurance-linked debt known as catastrophe bonds.Businessweek: – Pension funds and catastrophe bonds: What could possibly go wrong? – Pension funds, in particular, have moved into catastrophe bonds. But Ed Noonan chief executive officer of Validus Holdings, which manages an investment portfolio of insurance-linked securities. Says other fund managers are becoming irrationally exuberant about a high-yield risk that’s fundamentally unlike any of their other investments.AllAboutAlpha: – Catastrophe bonds and climate hedging: A talk with Barney Schauble of Nephila. – We were fortunate enough to get Barney Schauble of Nephila to sit still for some questions about the effects of climate change and what rational investors are doing about them. Investment StrategyLPL Financial: – The yield decline resumes. – Bond yields resumed a downward trend during the first quarter of 2014. After rising for much of 2013, better valuations, slower-than-expected first quarter 2014 economic activity, China growth concerns, and geopolitical fears over Ukraine-Russia helped push prices higher and yields lower, led by longer-term securities. Income-seeking investors can take solace, however, in yields remaining near two-year highs for many high-quality bond sectors.Think Advisor: – Bonds, equities back in favor. – The latest fund flow figures from Morningstar show that investors added close to $40 billion to long-term U.S.-domiciled mutual funds in March. This movement included “strong flows” to developed international markets as well as “a rebound” in flows to intermediate-term bond funds.About.com: – The right and wrong reasons to shift your asset allocation. – According to Barron’s the average holding period for mutual funds is just three years. Based on the overall fund flow data, one reason for this short holding period is investors’ attempt to base allocations on market conditions rather than a longer-term plan. This kind of bad decision-making is the rule rather than the exception. And when investors buy high and sell low, these poor entry and exit points prevent them from gaining the full benefit of the long-term return potential of their investments.Business Standard: – Leading investors lift equity holdings; cut bonds, emerging stocks. – The world’s top investors added exposure to equities this month and cut bonds and cash as they grew increasingly confident that geopolitical tensions are unlikely to derail the global economic recovery, Reuters polls showed on Wednesday.HighTower Advisors: – Objects in the mirror are closer are closer than they appear. – The key to navigating the next chapter in bond investing is to know the number – “duration”. Duration is a statistical calculation that indicates the interest rate risk of a bond or bond portfolio.David Fabian: – Time to trade in your aggregate bond ETFs. – Over the years I have seen investors make a number of mistakes with their income portfolios. Typically these range from having too much cash to being over allocated to a single asset class. However, the most egregious error that I come across all too frequently is the use of aggregate bond funds as core fixed-income holdings. Bond FundsReuters: – Gundlach’s DoubleLine Capital sees third straight month of inflows. – Jeffrey Gundlach’s DoubleLine Capital said on Thursday it had $442.5 million of net inflows into its open-end funds for April, the third consecutive month of new cash for the Los Angeles-based firm.WSJ: – Pimco’s Total return fund saw $3.1 billion outflow last month. – Investors pulled $3.1 billion from Pacific Investment Management Co.’s flagship Total Return Fund in April, marking the 12th consecutive month of outflows.PIMCO: – Global central bank focus. – While the Fed’s qualitative guidance may have increased uncertainties over monetary policy, volatility will likely remain contained by powerful short- and long-run forces related to the economic outlook.Reuters: – DoubleLine’s Gundlach suggests shorting homebuilders. – Home ownership rates in the United States will likely fall to levels last seen in the 1980s as baby boomers retire and millennials wait longer to form households, the manager of the DoubleLine Total Return fund said Friday, recommending that investors short exchange-traded funds focused on homebuilding companies.Donald van Deventer: – Kinder Morgan energy partners leads 20 best value long-term bond trades. – One measure of reward to risk in bond investing is the ratio of credit spread to default probability. We rank 27,674 bond trades on April 25 and rank those over 20 years to maturity by this criterion of “best value.”MarketWatch: – Hedge fund manager whitebox launches tactical income mutual fund.– Veteran Alternative Fixed Income Team to Manage Fund CEO Redleaf: “Low yields are disappointing many investors. We search the entire fixed income market to focus on pockets of opportunity that the benchmark-hugging funds might only be able to participate in peripherally.”WSJ: – Alternative mutual funds draw concerns. – Alternative mutual funds are growing in popularity, but some financial advisers say they are not yet sold on these complex and evolving products.