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This Week’s Top Bond Market Stories – October 26th Edition

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Learn Bonds

Learn Bonds: – Municipal Bonds: A case study of Detroit’s fiasco. – Lawrence Mayers takes a closer look at Detroit’s bankruptcy in detail. Because Detroit provides a great example of what investors should look for before and during an investment in a city’s municipal bonds.

Learn Bonds: – Risks of rising interest rates for long term bond holders. – The general consensus is that interest rates in the United States are expected to move upwards over the next year or two. This possibility raises a concern for those individuals that have invested in longer-term bonds in the hopes of gaining a higher yield for their portfolios.

Learn Bonds: – Is there wisdom in looking beyond bonds for yield? – Individual bonds bring many advantages to the table comparatively speaking: a guaranteed return of capital, a dependable stream of income, and control over maturity, credit quality, yield, and tax consequence. However, despite the benefits and flexibility inherent in owning them, the low interest rate environment has created relative bond yield deprivation, which, especially for risk sensitive investors, poses a dilemma.

Learn Bonds: – Investors should think twice about owning mortgage REITs. – Mortgage REITs, unlike equity REITs, are a class of real estate investment trusts that concentrate their efforts on owning mortgage debt. By leveraging their investments, mortgage REITs are able to offer investors extremely enticing dividend yields. And in today’s yield-starved world, some investors reaching for yield may have found their way into mortgage REITs. But are the right option?

Learn Bonds: – Rethinking the United States ‘AAA’ rating. – Does the U.S. deserve its AAA rating? Financial Lexicon takes a look.

 

Education

PIMCO: – Does fiscal policy matter for investors? – The cloud of dysfunction hanging over Washington, likely means lower rates for longer. PIMCO’s Tony Crescenzi explains.

 

Municipal Bonds

ETF Trends: – Muni bond ETFs look attractive compared to Treasuries. – After the U.S. shutdown scare, municipal bonds fell behind the rally in Treasuries. As a result, the widening yield ratio could now signal a buying opportunity for muni bond exchange traded funds.

ETF Trends: – Market vectors: Woe is munis? – I cannot help but feel that fixed income investors may currently be finding themselves in a hope-and-despair loop, reeling most recently from political brinkmanship over what may occur in January 2014: another round of brinkmanship and ultimately, the looming possibility of Federal Reserve tapering and higher interest rates.

Bloomberg: – Biggest supply wave since July means Treasuries win. – The U.S. debt-ceiling deal has unleashed the biggest wave of municipal borrowing since July, driving local bonds to the cheapest in almost two months versus Treasuries and luring buyers such as Deutsche Bank AG’s private-wealth unit.

WSJ: – Puerto Rico bonds a drag on client portfolios. – To the dismay of some financial advisers, the selloff in Puerto Rico municipal bonds has dinged many client portfolios. Advisers who believe the bonds will recover are now selectively buying shorter-term issues they consider better priced with little risk.

Ycharts: – Tax-free income the best revenge: Muni comeback. – with the yield on the 10-year Treasury and high quality corporate bonds still stuck below 3% what’s an income investor to do? Check out municipal bonds, that’s what.

Reuters: – RPT-Court to decide if Detroit really is broke. –  In a federal court building in downtown Detroit, beginning on Wednesday morning, the largest municipal bankruptcy filing in U.S. history comes down to a single question: Is Detroit bankrupt?

Bloomberg: – How Wall Street fed Puerto Rico’s $70 billion borrowing binge. – Seven years ago, in the wake of a government shutdown caused by a $740 million budget deficit, Puerto Rican officials vowed to fix the island’s finances by 2010. Now investors are calling their bluff.

SF Gate: – California selling $2.2 billion in municipal bonds. – $2.2 billion. That’s how much California is selling in general obligation bonds this week, the biggest such offering since April. A strong economy and tax increases championed by Gov. Jerry Brown have prompted credit-rating upgrades this year from S&P and Fitch.

FT: – Puerto Rico: Small tropical island, giant muni bond debt. – The precarious state of Puerto Rico’s municipal debt market has come into focus after William Galvin, Massachusetts secretary of the commonwealth, launched an investigation into sales of the US territory’s bonds by leading mutual fund managers to residents of his state.

 

Treasury Bonds

David Fabian: – Bond bulls back in control. – The Federal Reserve decision not to taper its asset purchase programs during its September meeting, sent interest rate sensitive securities soaring. Since that announcement, we have seen a modest rally in fixed income that is looking like it might continue through the balance of the year.

Donald Van Deventer: – What debt ceiling damage? Treasury forecast down 0.10%, 1-month bill rates normal. – This week’s implied forecast reflects the midnight October 16, 2013 Congressional agreement to temporarily lift the debt ceiling for the United States of America. One month Treasury bill yields have returned to the 0.01% level after peaking at 0.32% on October 15.

FT Adviser: – “Tapering is off the table”. – Fresh from having made $1bn impeccably timing the putative US recovery in the first half of this year (and Japan, natch), Andrew Law of Caxton Associates – one of the world’s most successful macro traders – has now turned bearish, and in quite a big way.

 

Corporate Bonds

John M. Mason: – Bond market on track for record year! – My guess is that we will see the volume record broken this year for new high-grade corporate debt issues. This, of course, will mean that investors will be able to place higher yielding, high-grade corporate debt into their portfolios in 2014. The risk is that as interest rates proceed to higher levels … bond prices will decline. This is a tradeoff, however, that must be faced.

WSJ: – Low rates bring bond bonanza. – Highly rated issuers sold more than $12 billion of bonds Thursday, taking advantage of robust investor demand and the latest tumble in market interest rates to stock up on cash.

Morningstar: – Corporate bond market has more room to recover. – Morningstar bond analysts generally hold a balanced view that corporate credit risk will either remain stable or improve slightly.

Trading Floor: – Corporate bonds bull run set to march on. – The present environment has been fertile for corporate bonds investors with the biggest risk factors out of the market or downscaled as themes. Subsequently, corporate bonds, especially high yield, have rallied.

 

High-Yield

InvestmentNews: – For near-term boost, go with high-yield fixed income. – With most signs pointing toward several more months of uninterrupted quantitative easing, it isn’t too late to jump tactically into the high-yield bond market for a near-term portfolio boost.

InvestmentNews: – Time to ditch high-yield bonds for stocks. – High-yield-bond funds have been among the best performers since the financial crisis, but Mike Roberge, chief investment officer at MFS Investment Management, thinks that it is time for investors to move their high-yield allocation into stocks.

Bloomberg: – Legg Mason’s brandywine shuns China for European junk bonds. – Brandywine Global Investment Management LLC, a unit of Legg Mason Inc., is avoiding Chinese high-yield debt in favor of bonds from Europe, which economists bet will return to growth after five quarters of contraction.

Bloomberg: – Junk bonds to lose 1.5 percentage-point QE cushion, fridson says. – Investors in junk bonds will lose a yield cushion of more than 1.5 percentage points as the Federal Reserve winds down its unprecedented quantitative easing program that’s bolstered credit markets for five years, according to Martin Fridson.

Forbes: – Strike while the iron is hot. – Many high quality “junk” bonds are yielding in the six to seven percent range. There are even some investment grade corporate bonds that can be bought for a mid-single digit yield. Granted the days of double digit investment returns are not as easy to find, but considering the substantial potential risks in retaining ownership of one’s business, earning a five to 10 percent return on one’s money is not the worst thing in the world.

FT: – Default fears hit JC Penney bonds. – Fears of JC Penney defaulting on its debt have escalated after worries over the department store’s future were exacerbated by an analyst’s prediction that its share price would plunge to $1.

ETF Trends: – Popular PIMCO short-term, high-yield bond ETF gets euro-hedge. – PIMCO and European provider Source expand on the popular high-yield, short-duration bond strategy with a London-listed, euro-hedged exchange traded fund version.

FT: – M&A bonds surge to highest in 6 years. – A burst of investor “animal spirits” has boosted the value of mergers and acquisitions-related bonds to the highest raised since the financial crisis.

 

Emerging Markets

Benzinga: – EM local debt ETFs offer opportunity. – Equity-based emerging markets ETFs have languished through some rough performances in 2013, but their bond counterparts have tumbled mightily as well.

Emerging Markets Daily: – Capital outflow from EM bond funds quickened, hard currency bonds pressured the most. – For the week ending October 23, emerging markets bond funds experienced $1.6 billion of outflows (0.7% asset under management AUM), equivalent to the total outflow in the past four weeks, according to data provided by EPFR Global and Barclays.

 

Catastrophe Bonds

Stockhouse: – J.P. Morgan launches new emerging markets fixed income index. – J.P. Morgan today announced the introduction of a new emerging markets fixed income index, the J.P. Morgan Middle East Composite Index, that holistically captures the Middle Eastern U.S. dollar-denominated debt market covering sovereign, quasi-sovereign and corporate issuers. The MECI represents 73% of the Middle Eastern US dollar external debt asset class, tracking 61 issuers and 167 instruments spanning 10 countries. The new addition to the J.P. Morgan family of fixed income indices has a total market value of $156.5 billion.

 

Bond Funds

ETF Trends: – PIMCO’s Hodge talks active ETFs. – PIMCO Chief Operating Officer Douglas Hodge talked with ETF Trends Editor Tom Lydon at the Morningstar ETF Invest Conference in Chicago earlier this month about PIMCO’s foray into ETFs and where actively managed ETFs could be headed from here.

AL.com: – Are my bonds safe? – When people talk about stocks and bonds, many people intuitively associate “safety” with bonds and “risky” with stocks. While it’s certainly true that, in general, stocks are more volatile than bonds, bonds can be pretty risky under certain circumstances. I’ve found that a lot of people also find bonds to be confusing to understand. Let’s start with a few bond basics.

Business Insider: – The real bubble is in the bond market – 700 years of market data. – Central bank policies have caused a bubble is in bond markets –– not surprising as those are the instruments that are bought before the funds end up back with the central bank in the form of excess reserves. Bond yields have rarely been this low in the period since 1800. Indeed, the only other time was when the Fed was also manipulating the market during and after WW2.

Benzinga: – International bond ETFs breakout. – Both developed and emerging market international bond ETFs are offering higher yields as well as more upside potential.

George Spritzer: – Bill Gross sees value in depressed closed-end funds. – According to recent SEC filings, Bill Gross invested over $5.8 million of his personal money in four PIMCO closed-end bond funds on Monday. Mr. Gross often steps up to buy Pimco CEFs when he sees value. Sometimes he buys funds that he manages himself, but in this case, he purchased four funds run by other Pimco managers.

Trading Floor: – Bond Update: Where to find value on the back of the rally. – As mentioned yesterday, European corporate bonds have experienced a significant rally. The current levels indicate that some risk factors have been downscaled, while corporates in general are also in pretty good shape with default ratios at low levels.

MarketWatch: – 7 bond funds that are now alluringly cheap. – If you’re looking for a bargain on the market right now, take a look at closed-end mutual funds, and especially at some of the closed-end funds that invest in bonds.

Forbes: – Index fund mislabeling creates problems. – We are regular victims of inaccurate labeling by mutual fund companies. The problems are generally associated with actively managed funds, but there are also issues within the index fund community. It would be great if some of the index funds the industry said existed actually did exist.

Morningstar: – 6 things every investor must know about closed-end funds. – Here is a synopsis of six things every potential CEF investor should know.

About.com: – PIMCO’s ZROZ ETF: The best way to trade the bond market. – The vast majority of bond investors hold long-term positions designed to produce income and provide portfolio diversification. While the conservative approach is the most typical, there is no shortage of investors who look for ways to make short-term trades to capitalize on daily, weekly, or monthly moves in the market.

 

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