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This Week’s Top Bond Market Stories – November 2nd Edition

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Learn Bonds

Learn Bonds: – Are you missing out on municipal bond market value? –  A lot of people I have talked with recently are suggesting that if an investor is looking for more (after tax) yield these days that it might be a good idea to look at the bonds issued by state and local governments. So why is municipal debt so attractive right now, and should you be thinking about adding it to your portfolio?

Learn Bonds: – Sympathy for the Fed Chairman. – The Fed was not shy about placing part of the blame for the sluggish economy at the feet of elected officials. The FOMC statement read:  “Fiscal policy is restraining economic growth.” Many market participants and pundits took this as a reference to the partial government shutdown and debt ceiling debate. We believe that the Fed’s blaming of fiscal policy goes far beyond October’s developments.

Learn Bonds: – How do credit ratings influence your bond portfolio? – Investors researching individual bonds are likely to be confronted with a confusing “alphabet soup” of letters in individual bond listings, for example Baa1/BBB+. But what do all those letters mean and how can you use them to make better investment decisions.

Learn Bonds: – A closer look at zero-coupon bonds. – Given the dearth of investment articles on zero-coupon bond opportunities, I thought I’d write a bit about what I discovered when recently searching for currently-available zeros trading on the secondary market.

Learn Bonds: – Bond ladders – Consider this before building them. – Laddering a bond portfolio is one method of managing interest-rate risk and liquidity needs while also giving yourself a chance to earn higher yields than those offered on short-term bonds. There are all sorts of bond ladders fixed income investors can build. They can be spread out over multiple decades or just a few years. They can consist of only bond funds, just individual bonds, or a combination of both. And their focus could be within one segment of the bond market or spread out across various segments (Treasuries, corporates, munis, etc.).

 

Municipal Bonds

Yahoo Finance: – These types of bonds are making money. – The headlines for some municipal bonds are negative. But, according to one strategist, the bad press could make muni bonds a buying opportunity.

MarketWatch: – Puerto Rico muni bonds get some tailwind. – Puerto Rico municipal bond prices have been falling at a startling pace this year, sent skidding by investors jittery over the U.S. territory’s financial straits and a weak market environment. But signs are emerging that the island’s tax-exempt bonds may have reached the bottom.

Cate Long: – Puerto Rico’s bond market and its ratings: How bad it is? – Puerto Rico’s bonds are trading as though they have junk ratings. There has been a lot of resulting talk about the disconnect between Puerto Rico’s investment-grade ratings and the yields on its debt.

Barron’s: – Puerto Rico debt gaining popularity – As a hedge. – I’ve written recently about how Puerto Rico debt is finding favor among hedge funds rather than plain old buy-and-hold muni investors lately, as a way of cautioning retail investors tempted by Puerto Rico’s high yields about who else is roaming that marketplace. Today David Kotok, chairman and chief investment officer at Cumberland Advisors, offers an in-depth look at one way hedge funds might use Puerto Rico debt to their advantage.

BusinessInsider: – Puerto Rico’s debt crisis: Puerto pobre. – Puerto Rico’s debt has long been a staple of American municipal-bond funds because of its high yields and its exemption from federal and local taxes–of particular appeal to investors in high-tax states. That let Puerto Rico keep borrowing despite its shaky economic and financial condition, until Detroit’s bankruptcy in July alerted investors to the threat of default by other governments in similar penury.

Barrons: – Munis make the shopping list. – Put a bunch of bond-fund managers from different firms in a room and you’re likely to hear an array of contradictory viewpoints on markets, valuations, and investing strategies. When nearly everyone agrees on one thing, it’s worth noting. The current cause for agreement: Municipal bonds are cheap, and people should buy them now.

Forbes: – The Puerto Rican bond plot thickens. – The federal government is now putting under its microscope mutual fund companies that have invested billions of dollars in Puerto Rican municipal debt, according to several news reports last week.

 

Treasury Bonds

Yahoo Finance: – Here’s why ‘The Street is all wrong’ about bonds. – The bond market has been especially volatile and tortured lately given the Fed’s head-fake on tapering in September, followed by the government shutdown and debt ceiling standoff that ate up most of October. But at least one market watcher thinks the trend in fixed income has gone too far, and gotten way too negative.

WSJ: – Treasury bonds fall amid Fed anxiety. – Prices of Treasury bonds fell for a third-straight session due to concerns that the Federal Reserve might start cutting back its bond-buying program earlier than many investors thought.

Euromoney: – U.S. government bonds: Short-term treasuries hit by shutdown chaos. – Concerns that payments on short-term Treasury bills would not be met caused investors to exit the market in early October: total outflows from money-market funds reached almost $54 billion in the first two weeks of the month. “The dislocation became so bad that one day the October 17 paper was yielding 50 basis points at moments. Last month yields were close to zero. Rates were extremely volatile,” says the head of trading at a U.S. bank.

WSJ: – U.S. Treasury considering smaller, more frequent auctions of TIPS. – The U.S. Treasury is considering smaller, more frequent auctions of government bonds that protect investors against rising consumer prices, known as inflation.

CNN Money: – Bond rates unlikely to soar again. – So much for the bond bubble bursting. And that may be great news for consumers, especially those looking to buy a house or refinance their mortgage.

WSJ: – Fed balance sheet not seen returning to normal until at least 2019. – The Fed’s balance sheet, which is fast approaching $4 trillion in total assets, won’t return to normal until sometime between mid-2019 and mid-2021, according to new projections prepared by central bank researchers.

 

Investment Gradee Bonds

Standard and Poor’s: – Third-quarter U.S. corporate bond returns rebound after a tough summer. – After getting hit hard over the summer, U.S. corporate bonds recovered in the third quarter and continue their move into positive territory. In this CreditMatters TV segment, Standard & Poor’s Director Nick Kraemer explains why the bond market looks poised to traverse a more stable path throughout the rest of 2013.

Trading Floor: – Vital inspiration for your corporate bond strategy. – With equities setting new records virtually on a daily basis, perhaps you should consider adding corporate bonds to your portfolio. Tradingfloor.com is demystifying this often complex world with a weekly “bond inspiration” list. Adding corporate bonds to your portfolio will increase your diversification.  High yield bonds can give you a more specific cash flow. Investment grade corporate bonds offer excellent hedging opportunities.

Morningstar: – Corporate bond market continues to recapture losses. – The demand for corporate bonds should push corporate credit spreads tighter, says Morningstar’s Dave Sekera.

BroadwayWorld: – U.S. Corporate bond market seeks new trading solution as QE tapering looms. – Danger signs in the US corporate bond market are flashing like a lighthouse’s beacon and according to new TABB Group research, the market is searching for new alternatives to trade credit as low interest rates have driven credit issuance to all-time highs.

Bloomberg: – Wells Fargo leads doubling in U.S. corporate bond offerings. – Wells Fargo & Co. (WFC), the largest U.S. mortgage lender, and ABN Amro Bank NV led U.S. corporate bond sales that more than doubled from last week as issuers captured borrowing costs at four-month lows.

 

High-Yield

Motley Fool: – The high cost of high-yield BDCs. – John Bogle revolutionized and democratized investing when he founded Vanguard and pioneered the low-cost index fund. Thanks to his firm, investors can buy broad market funds with microscopic fees measured in basis points. Unfortunately, there isn’t yet a Vanguard of the middle market. Those who want to invest in small, middle-market companies through business development companies will have to pay up!

Income Investing: – Forecasting junk-bond returns mostly luck – Fridson. – I wrote recently how junk bonds are on pace for a “coupon-clipping” year, in which year-end returns pretty closely match the market’s average yield to start the year. While that might seem commonplace, it’s actually incredibly rare in the junk-bond market, where short-term bouts of volatility trump long-term yield averages over most single calendar years.

FTSE Global Markets: – High yield stays on track. – After surviving a mid-year fixed-income thrashing, high-yield corporate bonds, though well off their highs of last year, have nonetheless fared significantly better than their investment-grade peers. Yet questions remain: what impact might the Fed’s eventual tapering have on the segment? Will credit fundamentals remain stable enough to keep high yield products on the plus side over the near term? Dave Simons reports from Boston.

Portfolio Adviser: – High yield headwinds support case for convertibles. – In the past, high yield bonds outperformed traditional fixed income securities during periods of high interest rates because of strong economic growth and rising cash flows. Today, however, the high yield market faces two major headwinds.

High Yield Investing: – Junk bonds poised to outperform. – Junk bonds are already up more than 6% so far in 2013 – a year when other types of bonds have stumbled – but that doesn’t preclude high yield from continuing to outperform. So says ING Investments in its latest fixed-income report.

4Traders: – BMO’s Scott Kimball sees opportunities in the upper end of high yield. – BMO’s Scott Kimball says there are opportunities in the upper end of the high yield market. You just have to do a little extra credit work to find them.

ETF Trends: – Junk bond ETFs loving a no tapering world. – The May peak to June trough decline for the iShares iBoxx $ High Yield Corporate Bond ETF, the largest high yield bond ETF by assets, was 7.5%. That decline was induced primarily by speculation the Federal Reserve was preparing to taper its quantitative easing program.

 

Emerging Markets

IFAOnline: – Why emerging economies will (again) pass the resilience test. – Short duration emerging market bonds look attractive, as the threat of a rise in U.S. interest rates looms large, writes Damien Buchet, head of emerging market debt at AXA IM.

China Money Network: – Emerging market bonds will show long-term strength. – Global fixed income markets came under significant pressure between May and August as investors prepared for the reduction of quantitative easing by the U.S. Federal Reserve. While most sectors saw negative total returns, emerging markets (EM) debt was among the largest under-performers.

Fundaction: – Managers push broad EM debt acceptance. – Managers of emerging market bond funds at told an audience at FundForm USA not to look for opportunities in any one area of the market. Splitting up the emerging market debt universe via currencies or region may cause investors to miss out, the managers said.

MarketWatch: – BofA Merrill Lynch global research launches emerging markets local Currency non-sovereign bond indices. – BofA Merrill Lynch Global Research today announced the launch of four emerging markets local currency bond indices, the first of their kind, designed to track the performance of local currency non-sovereign emerging markets fixed rate debt. Development of these new indices has been driven by the growth of interest in this market segment following the rapid increase in local currency sovereign and external corporate debt markets.

ETF Trends: – Punishment could be a gift for EM bond ETFs. – They always say it is darkest before the dawn. Perhaps the proverbial “they” were referring emerging markets bonds and the exchange traded funds that hold those bonds.

WSJ: – Emerging markets, U.S. corporate debt expected to be among better fixed income performers through 2018, according to Standish. – Emerging market debt and U.S. corporate bonds are expected to be among the better performing fixed income segments through 2018, although asset returns are likely to be below historical averages over the next five years, according to the five-year outlook published by Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.

Bond Vigilantes: – Will the Fed push EM over the edge? – We’ve been very worried about emerging markets for a couple of years, initially because of surging portfolio flows, better prospects for the US dollar and historically tight valuations. But increasingly recently our concern has been driven by deteriorating EM fundamentals. A combination of miscommunicated and misconstrued Fed speak in May brought things to a head, and EM debt crashed in May to July, although the asset class has since recovered roughly half of the losses. So where are we at now?

 

Catastrophe Bonds

WSJ: – Investors turn to catastrophe bonds to boost returns. – Investors Seeking Increasingly Novel Ways to Boost Returns Amid Low-Yield Environment.

Artemis: – 2013 expected to beat catastrophe bond issuance record. – Munich Re, the world’s largest reinsurance firm, expects that issuance of catastrophe bonds and non-life insurance-linked securities in 2013 will beat the record volume issued set in 2007, according to its latest quarterly ILS market report.

 

Bond Funds

BusinessWeek: – A bond whiz teams with a nobel winner who warns about bubbles. – Jeffrey Gundlach, the unabashedly bombastic bond manager whose DoubleLine Capital is one of the fastest-growing mutual fund startups in history, is joining with Yale finance professor Robert Shiller to launch the DoubleLine Shiller Enhanced CAPE Fund. The offering  marries Gundlach’s active fixed-income management style with a stock strategy based on Shiller’s value investing guidelines.

Morningstar: – Once again on top. – PIMCO’s Enhanced Short Maturity ETF has taken the top spot in the ranks of active ETFs from its sibling, PIMCO Total Return ETF, as investors have looked to reduce interest-rate risk.

Millionaire Corner: – Affluent investors retreat to the sidelines in October. – What a difference a month fraught with gridlock and government upheaval can make. When surveyed by Spectrem’s Millionaire Corner about how they would be investing in the coming month, Affluent investors said they would be retreating to the sidelines (45.75 points, a gain of 15 over the previous month, when those who responded that they would not be investing had dropped to the lowest level since March 2012).

Cam Hui: – A trading opportunity in bonds. – I believe that there may be a near-term trading opportunity to go long the bond market here. The momentum in high frequency economic releases have been tanking, as shown by this chart of the Citigroup U.S. Economic Surprise Index – and that should be conducive to lower bond yields (and therefore higher bond prices).

Bloomberg: – The battle to be bond king. – For the first time in the history of exchange-traded funds, the largest bond ETF doesn’t belong to iShares. The $16.9 billion Vanguard Total Bond Market ETF has surpassed the iShares iBoxx $ Investment Grade Corporate Bond ETF, which has $16.5 billion in assets. BND didn’t snatch the crown as much as it was lost by LQD, which saw $10 billion flow out this year as investors fearful of rising rates fled funds holding longer-dated bonds. BND itself has lost $1 billion in assets this year — but that’s $9 billion less than LQD.

U.S. News Money: – 14 Investing ideas for 2014. – The next year is loaded with uncertainty, but planning ahead can help reduce it. So how can you invest in such uncertain times? Here 14 ideas from investment firms and advisors on what do in 2014.

Investors.com: – Foreign Bond ETFs: Strategist see role in portfolio. – With interest rates in an uptrend in the U.S. and lots of volatility and uncertainty in the U.S. markets, adding international fixed-income ETFs to one’s portfolio can be a useful diversification strategy.

AOL Finance: – New ‘secure’ bond paying 6.5% interest a year. – To take advantage of this rising demand for high-income bonds, lots of companies have started issuing retail mini-bonds aimed squarely at private investors. However, these bonds would be more popular if companies would offer nervous investors more security, both for their capital and income.

ETF Trends: – A surprising bond ETF safe haven. – Emerging markets bonds exchange traded funds, both the dollar-denominated and local currency varieties, have come under significant pressure this year. Investors have not been shy about pulling capital from these funds amid fears that tapering of the Federal Reserve’s quantitative easing program would crush leveraged developing markets that had freely borrowed in previously weak U.S. dollars.

FT Alphaville: – Money-go-round theme du jour, bonds beat cash. – So what have the retail investors been up to? Buying stocks! But, even with yields down low and no-where to go, they are yet to break the bond buying habit.

FT: – Bond funds look to cash in on equity surge. – When even bond fund managers are recommending equities, it must be time for investors to take a sceptical look at fixed income in their portfolios.

 

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