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This Week’s Top Bond Market Stories – October 19th Edition

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Learn Bonds

Learn Bonds: – Liquidity risk and the role it plays in your portfolio. – From an investor’s perspective, liquidity should be thought of as a risk factor. All else constant, an investor would prefer to hold liquid bonds over illiquid bonds, so investors must demand higher rates of return in exchange for liquidity risk. Just like other risk factors such as credit risk and term risk, the added risk cannot be justified without added compensation.

Learn Bonds: – Why this bond pro is betting against bonds. – John Mason takes a closer look at bond fund manager Stewart Crowleys bet against bonds, which we highlighted last week.

Learn Bonds: – How should you build your individual bond portfolio? – From my perspective there are several ways to think about investing in bonds and/or structuring an individual bond portfolio. If you know you will be committing funds periodically to the bond market over a stretch of years, or perhaps even decades, and don’t want to over think each investment, then I think a passive or “agnostic” interest rate and maturity approach is prudent.

Learn Bonds: – 4 Ways to find ‘real’ yields in a low interest-rate environment. – Looking for yield? You are certainly not alone. The demand for income-producing assets is growing and will continue to grow in the years ahead as more and more baby boomers leave the full-time workforce and navigate their way through a new chapter in their lives. But the Fed’s ultra-easy monetary policy is complicating things for income-focused investors by helping to hold yields lower than they otherwise would be. So what’s an investor to do?

Learn Bonds: – What type of advisor makes sense? – Just as there are many different types of professionals in almost any field (doctor, lawyer, architect, builder), there are many different types of advisors. Once someone has a certain amount of experience, their knowledge base should be similar to other advisors in the same field. Each advisor will have based their personal philosophy on their own experience over time. Advisors have very different styles from one another and finding a match to not only the type of advice you need but a communication style is important.

 

Education

Harvard Business School: – Monetary policy drivers of bond and equity risks. – Given the importance of nominal bonds in investment portfolios, and in the design and execution of fiscal and monetary policy, financial economists and macroeconomists need to understand the determinants of nominal bond risks.

ETF Trends: – The ABCs of bond ETF distributions. – Matt Tucker, iShares, Head of Fixed Income Strategy, looks at how bond ETF distributions work.

 

Municipal Bonds

WSJ: – Puerto Rico could see downgrade next year if unable to meet budget targets. – Puerto Rico could see a downgrade of its general credit rating by the middle of next year if it isn’t able to meet its budget targets, and the municipal bond market already views the island as a “junk” rated credit, the head of municipals for one of the largest money managers told reporters Thursday.

BusinessWeek: – Build America bonds biggest loser in yield-rise bet. – The $188 billion market for Build America Bonds is set to trail the rest of municipal debt for the first time as issuers face cuts to their federal subsidies while investors bet interest rates will rise.

Wall St Pitt: – Storm of Puerto Rican bonds hits U.S. mainland. – Over the past few weeks this blog has addressed the storm to hit individual investors who own municipal securities issued by The Commonwealth of Puerto Rico. First it was major securities houses in August and September ordering tens of thousands of brokers to stop selling these Muni Bonds to clients.

Bloomberg: – Puerto Rico may skirt new debt sales to avoid high costs. – Puerto Rico debt is poised to climb after the commonwealth’s Government Development Bank said the island may skip borrowing before June because of adequate funds.

FT: – Puerto Rican woes hit U.S. bond insurers. – A downgrade of Puerto Rican debt could eat into the capital cushions of the two biggest bond insurers, as they work to rebuild their finances after the credit crisis, a rating agency has warned.

Reuters: – Moody’s lowers Stockton, Calif., pension bonds deeper into junk. –  Moody’s Investors Service lowered the pension obligation bonds of Stockton, California, to ‘Ca’ from ‘Caa3′ on Monday and changed its outlook on them to negative from developing, citing how the city would treat the debt in its plan for exiting bankruptcy.

SacBee: – Puerto Rico Treasury announces final first quarter revenues. – $126 million increase in September revenues at closing, 1st quarter FY 2014 revenue collections increased by $88 million or 5.4% YOY, 1st Quarter revenues exceed budget estimates by $10.4 million.

FT: – Oppenheimer defends Puerto Rican bond holdings. – OppenheimerFunds, one of the largest managers of US municipal bond funds, has defended its commitment to holding Puerto Rican debt, despite falling prices of the territory’s bonds.

 

Treasury Bonds

Reuters: – Foreign central banks scoop up Treasuries during debt ceiling fight. – Foreign central banks have been scooping up billions of dollars of U.S. Treasuries in the recent weeks despite the contentious fight in Washington over the budget and federal borrowing that had threatened a U.S. default.

BusinessWeek: – Treasury yields fall to lowest in week on bets Fed keeps buying. – Treasury 10-year note yields fell to the lowest level in more than a week on speculation the Federal Reserve will maintain its bond-buying program into next year after the government shutdown weighed on economic growth.

CNBC: – U.S. Treasurys? No thanks, I’ll take bank debt. – Has bank debt become more attractive than U.S. Treasurys? That’s what recent market developments indicate. The TED spread, which measures the difference between interest rates on interbank loans and U.S. government Treasury bills, turned negative for the first time ever on Wednesday, indicating that investors are more willing to buy bank debt over U.S. Treasurys.

Reuters: – Bank capital constraints didn’t worsen bond selloff -NY Fed. – The dramatic Treasuries selloff in May and June of this year was worsened by banks paring back their activities because of reduced risk appetite for bonds, rather than because the banks faced capital constraints from new regulations, researchers at the New York Federal Reserve said on Wednesday.

CNBC: – Debt default damage already unfolding. – Just when will the threat of a U.S. debt default began to inflict damage on the U.S.economy and global financial system? It’s already happening. And until Congress gets over its temper tantrum and lifts the Treasury’s borrowing authority, it will get progressively worse.

About.com: – If Government debt is the problem, why aren’t Treasury prices falling? – At first glance, it makes no sense. The government is in “shutdown” as politicians debate the budget, and the Treasury could run out of money in just nine days if Congress fails to raise the debt ceiling. If the U.S. government were to default on its debt (i.e., fail to make payments), the result would be a massive spike in the yields on U.S. Treasuries (and a concurrent drop in price). Why, then, have government bonds remained relatively flat in the past ten trading sessions?

FT: – IMF says start of Fed tapering threatens $2.3tn bond losses. – Monetary tightening in the US threatens to expose financial excesses and vulnerabilities that could wipe trillions of dollars off bond markets, the International Monetary Fund warned on Wednesday.

BusinessWeek: – World keeps full faith in U.S. Treasuries if not politics. – Finance chiefs from nations holding more than $1.3 trillion of Treasuries signaled no plans to sell even as the U.S. faced condemnation for the fiscal fight plaguing the world’s largest economy.

 

Corporate Bonds

FT: – Corporate debt boom expected after U.S. budget resolution. – This month’s U.S. government shutdown also furloughed corporate debt issuance and now bankers expect a rebound in bond sales by companies.

Bloomberg: – Corporate bond sales in U.S. plunge 44% in week with shutdown. – Sales of corporate bonds in the U.S. plunged 44 percent as issuers avoided tapping the market with Congress wrestling over the government’s borrowing limit and a partial shutdown.

Globe and Mail: – A better way to invest in Apple? bonds. – As painful as owning Apple Inc. shares has been in the past 12 months – at one point, they were down by nearly half from their high – investors could at least take comfort in the $100-billion-plus mound of cash that the company is gradually, grudgingly, giving up.

ETF Trends: – iShares launches short-duration corporate bond ETFs. – BlackRock’s iShares mints short-duration versions of its popular investment grade and speculative grade corporate debt exchange traded funds to help investors mitigate the effects of rate risk.

Donald Van Deventer: – Morgan Stanley bonds: Continued improvement in default risk. – In this note, we turn to the U.S. dollar bonds issued Morgan Stanley and compare its current default probabilities with those we first reported on July 8, 2013. We seek to bring a bond market perspective to the outlook for Morgan Stanley as a complement to analysis based on a common stock holder’s perspective.

Bloomberg: – Machines trading $400 billion of bonds as humans retreat. – A record share of U.S. corporate-bond trading has moved to computers as buyers who traditionally transacted over the phone seek faster ways to buy and sell in a market where Wall Street’s human traders are retreating.

 

High-Yield

Money Marketing: – Is the future bleak for high-yield bonds? – High yield bonds are continuing to deliver strong performance but fund managers are warning that the quality of issuance could slowly start to deteriorate. As with other fixed income assets, high yield saw its share of challenges earlier this year as investors fled bonds amid mounting fears over tapering of the US quantitative easing programme.

The Economist: – An appetite for junk. – Companies have taken advantage of investors’ growing willingness to buy speculative bonds.

InvestorPlace: – 5 Signs that investors just can’t get enough risk. – So much for autumn being the worst time of the year for the stock market. Despite the political wrangling in Washington, investors continue to embrace higher-risk assets with open arms.

Income Investing: – Avg junk bond yield back below 6%; A coupon-clipping year? – The junk-bond market seems to be weathering the debt-ceiling showdown reasonably well: it’s up 0.37% in the past week and 1.5% over the past month, per a benchmark Bank of America Merrill Lynch index. Notably, the average junk-bond yield has slipped back below 6% for the first time since late July.

Financial News: – Junk bonds push the needle for buyout firms. – The junk bond market was once used by private equity to add a little bit more leverage to transactions. But, nowadays, about half of all debt financings for buyouts come from high yield. Issuance is at a record high.

CNBC: – Maximizing fixed-income investing using alternative strategies. – With bond investors still skittish over interest rate risk, the search for alternative investment strategies that produce consistent income is on.

 

Emerging Markets

BusinessDay: – HSBC strategists bullish on EM local bonds, stocks. – The outlook for inflation should determine investors’ cross-asset allocation, according to Pablo Goldberg, global head of emerging markets research at HSBC Securities, as the US Federal Reserve signals that the end of its quantitative easing policy is near.

Barron’s: – Thanks Congress, capital flowed out of EM, DM funds – equity and bonds. – In the week ending October 9, capital flowed out of EM equity and bond funds, but retail money’s risk-off attitude is extended to developed markets as well, data provided by Barclays analysts Durukal Gun and Koon Chow shows.

IFR: – Yellen nomination lifts emerging market debt. – Emerging credit markets have perked up on news that US President Barack Obama will nominate Janet Yellen to head the US Federal Reserve after Ben Bernanke’s term completes this year.

Randy Durig: – Achieving higher yields than EM bond ETFs with short maturity Yankee bonds. – At the completion of the third Quarter of 2013, we thought it would interest fixed income investors to compare the US dollar Yankee bonds that were acquired in our FX1 portfolio over the last 4 months with the iShares JPMorgan USD Emerging Markets Bond ETF and the iShares Emerging Markets Corporate Bond.

 

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

FT: – ‘Periphery’ bank bonds are the comeback assets. – Weakened mid-tier banks in the eurozone “periphery” economies are widely seen as holding back the continent’s broader economic and financial market recovery.

USA Today: – Some new funds worth considering. – As long as you’re throwing out the bums in Congress — you are, right? — why not throw out some of your old, poorly performing mutual funds? Once you’ve done that, you can look at new funds, some of which are extremely promising.

AllianceBernstein: – Investing in retirement: Bonds aren’t enough. – What should you invest in after the spigot of earned income is turned off? It’s a vexing question, especially since we expect lower stock and bond returns going forward.

Bloomberg: – Extended Fed taper to impact bonds, dollar. – Jeremy Stretch, head of FX strategy at CIBC, discusses the role of the Federal Reserve following the U.S. government shutdown, examines the bond and currency markets after the crisis and offers his outlook for when the Bank of England may raise rates.

ABC News: – How to decide if ultrashort-term bond funds are right for you. – As they anticipate the Federal Reserve’s eventual tapering of quantitative easing, investors worried about rising interest rates are wondering if they should hedge their bets on fixed income by putting money in ultrashort-term bond funds.

FT: – Sales of ultra-safe US covered bonds stall. – Six years after the US government first raised the possibility of writing new rules that would help US banks sell the special debt, that legal framework is no closer. When bankers and investors gather in New York this week for a conference about covered bonds in “the Americas” there is likely to be little excitement about the prospect of Washington – still in gridlock – creating new legislation for the debt.

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