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This Week’s Top Bond Market Stories – October 5th Edition

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Learn Bonds

Learn Bonds: – Making sense of the employment / jobs numbers. – Investors continue to prepare for an eventual acceleration of growth and inflation which does not appear to be on the horizon. This has caused a bifurcation among fixed income investors. Some investors want little or no risk and are holding large quantities of cash. Others are reaching for yield, almost recklessly. As with most things in life, the correct answer lies in the middle. Let’s break it down.

Learn Bonds: – “The great experiment” and what it means to bond investors. – This is a tough time to be investing in fixed-income securities. The reason for this is that the Federal Reserve has taken the financial markets into places it has never seen before. Thus, everybody is on “new” ground and everyone is just guessing about where the markets will go in the future. One can call current monetary policy the “Great Experiment” and market participants are just going to have to live with it!

Learn Bonds: – The debt ceiling time bomb no one is talking about. – On June 28, 2011 then Secretary of the Treasury Timothy Geithner wrote to then U.S. Senator Jim DeMint. The overarching theme of the letter dealt with the idea of prioritizing payments should the debt ceiling not be raised. But there is something else in the letter that was not covered in the press back in 2011 and something that I have yet to see covered today as it relates to the dangers of not raising the debt ceiling.

Learn Bonds: – Income Investing – Looking beyond stocks and bonds. – Financial Lexicon wraps up his series on income investing by looking beyond common stocks and traditional bonds, and discussing other income opportunities investors may want to consider for their portfolios.

Learn Bonds: – Bonds – A necessary component of the income investor’s portfolio. – In the second part of my series on income investing, I discussed the role that common stocks can play in an income investor’s portfolio. But stocks aren’t the only game in town. Bonds are also an important component of any diversified income-focused portfolio.

 

Municipal Bonds

Janney: – Fixed Income Strategy. – Janney’s Alan Schankel visited Puerto Rico last week. His take: Political will is strong but economic challenges remain.

Global Post: – U.S. municipal bond funds report $690 million of outflows. – U.S. municipal bond funds reported $690 million of net outflows in the week ended October 2, up from $159 million of outflows in the previous week, according to data released by Lipper on Thursday.

ETF Trends: – Muni bond ETFs: Redefine your muni core with intermediates. – Safe havens for investors are downright scary these days. Since Detroit’s record bankruptcy in July, investors have been more skittish than ever about municipal bonds, once a strong strand in the safety net of boring investments for Americans investors.

Bloomberg: – Texas fund’s first charter-school pledges buoy debt. – Texas public charter schools, the fastest-growing part of the state’s education system, are poised to see their bonds go to top grade from near junk as a $33 billion fund backed by oil revenue prepares to guarantee the securities for the first time.

Forbes: – The investor safety net is fraying. – Safe havens for investors are downright scary these days. Since Detroit’s record bankruptcy in July, investors have been more skittish than ever about municipal bonds, once a strong strand in the safety net of boring investments for Americans investors.

Bloomberg: – Cheapest state costs showing resilience to shutdown. – The biggest rally in U.S. state bonds in two years shows investors are betting the governments will weather the federal shutdown and any failure by lawmakers to raise the nation’s debt ceiling.

Reuters: – Detroit’s expected bond default seen raising constitutional issue. – Detroit is poised to default on about $641 million of its general obligation bonds on Tuesday, an event that is likely to spur a legal challenge over Detroit’s decision to take tax money earmarked for bond payments and apply it instead to city needs.

Bloomberg: – Shutdown seen imperiling funds for mass-Transit munis. – Municipal bonds backed by federal mass-transit aid are the most vulnerable to a U.S. government shutdown, according to Moody’s Investors Service.

Reuters: – Puerto Rico’s bond losses hit local investors. – The steep decline in prices of Puerto Rican bonds on the American municipal bond market is taking a heavy toll at home, where local institutions and individuals own an estimated 30 percent of the $70 billion of outstanding bonds.

Bloomberg: – Cuomo hurdles voters to seek AAA in $1 billion sale. – Governor Andrew Cuomo plans to sell $1 billion in bonds backed by sales taxes for the first time in 18 years as New York debt outpaces the $3.7 trillion municipal bond market by the most in two months.

 

Treasury Bonds

PBS Newshour: – Defaulting on U.S bond obligations could cause ‘mother of all financial crises’. – The Treasury Department warned in a report that if the government defaults on its obligations later in October, the economic impact could be widespread and even provoke another financial crisis. Annie Lowrey of The New York Times joins Judy Woodruff to explain the debt ceiling and potential consequences.

FT: – Treasury bill market hit by shutdown. – Investors stepped back from the Treasury bill market this week over concerns that the US government may delay interest payments this month as Washington appears well away from striking a deal that would raise the federal debt ceiling.

IndexUniverse: – Bogle: Swap Treasurys for corporates. – Bogle held forth on a number of subjects, including his ongoing suspicions that ETFs tempt investors into making decisions that hurt them in the long haul, and his view that aggregate bond indexes have too much Treasury debt and not enough corporate credits.

ETF Daily News: – New life for Treasury bond ETFs? – These are trying times for the fixed income world, in particular the U.S. Treasury market, as investors are pouring money into the rising equity markets since the start of the year. Plus, market apprehensions relating to the Fed’s possible announcement of scaling back some of its asset purchases in the September FOMC meeting took a toll on the bond markets for a couple of months.

WSJ: Yielding to new realities for government bonds. – From February to May, a rally in U.S. Treasurys, German bunds and U.K. gilts saw German yields hit record lows; from May to September, a selloff pushed U.S. and U.K. yields to two-year highs. Now, the Federal Reserve’s decision not to reduce its bond purchases has driven another move lower for yields. Eventually, yields should head higher again. But in the short term the outlook is decidedly murky.

 

Corporate Bonds

Donald Van Deventer: – Intel Corporation bonds: Intelligent diversification. – In this note, we turn to the bonds of another iconic American industrial company, Intel Corporation (INTC). We seek to bring a bond market perspective to the outlook for Intel Corporation as a complement to analysis based on a common stock holder’s perspective.

Bloomberg: – Hedge funds used obscure bond bet to win in GM bankruptcy. – General Motors Corp. (GM)’s bankruptcy, which wiped out shareholders and left taxpayers on the hook for billions of dollars, is generating a new wave of profit for hedge funds that supersized their claim by betting on an obscure pool of GM debt issued in the Canadian province of Nova Scotia.

Bloomberg: – BofA says bonds to beat stocks in debt gridlock. – Strategists from Bank of America Corp. to Wells Fargo & Co. predict dollar-denominated corporate bonds will outperform stocks this month if political gridlock persists with the government partially shut down this week.

Bloomberg: – Goldman said to make $1.5 million error in Ford bond sale. – Goldman Sachs Group Inc. (GS) mistakenly added about $1.5 million of interest costs to a Ford Motor Co. (F) bond sale last week by using the wrong Treasury note as a benchmark for the security, according to two people with knowledge of the transaction.

 

High-Yield

MarketWatch: – High yield bonds for retirement income? – For those that assumed credit risk before the financial crisis, they were taught a stern lesson, and for those that picked up exposure thereafter, high yield bonds have masqueraded as a relatively safe equity-alternative.

FT: – Fixed income set for doldrums. – Invesco Perpetual’s Paul Read, one of the most respected bond fund managers in the UK, has warned investors to keep their expectations low for bonds, in a dour client webcast this morning. He said it was “hard mathematically” to argue that bonds, particularly high yield, will deliver positive returns.

MarketWatch: – The junk bond credit clock is moving slower this time around. – Cries of a credit bubble appear to be coming back into vogue. But in the high yield bond market at least, if there is a bubble, the chug toward any sort of pop appears to have been slowed down by a lethargic economy and a responsive Federal Reserve.

 

Emerging Markets

Actuarial Post: – Focus on Emerging Market corporate debt. – Well-funded emerging markets (EM) benefited dramatically from the West’s financial crisis. Today EM corporate bonds have developed from a niche asset class to a globally acknowledged financing instrument. However, recent signs of slowing growth in EM geographies have called into question this asset class’ sustainability- are these concerns valid?

FT Beyond Brics: – EM bonds: a record September. – Few expected September to be a record month for sovereign debt auctions. Ever since the US Federal Reserve first hinted in May at a possible “tapering” of its massive bond buying programme, emerging market countries have found borrowing much tougher and more expensive. Borrowing costs soared and issuance shrunk accordingly.

Barron’s:  – Time to buy emerging-market debt. – Seventeen straight weeks of outflows from emerging-market bond funds have created both more-rational sentiment and decent valuations. Investors can feel safe jumping back on board.

ETF Trends: – Green shoots appearing, sort of, for EM bond ETFs. – Exchange traded funds offering exposure to emerging markets debt, both of the dollar-denominated and local currency varieties, are among this year’s most downtrodden funds. Spooked by increased borrowing costs for developing economies that lived off the fat of the Federal Reserve’s ultra-loose monetary policy, investors have not been shy about pulling cash from emerging markets bond funds.

 

Bond Funds

Wealth Management: – Finding yield in short duration bonds. – Bond investors have been racing for cover. During the first eight months of the year, shareholders withdrew $49 billion from intermediate-term funds and deposited $17 billion into short-term funds, according to Morningstar. Rising interest rates triggered the migration. When rates climb, shorter bonds are relatively resilient. Recently investors who moved to shorter funds have been rewarded. For the eight months, intermediate funds lost 2.7 percent, while short-term funds declined 0.4 percent.

IndexUniverse: – ProShares’ Sachs on hedging bond-duration risk. – Steve Sachs, head of capital markets for ProShares, thinks an ETF strategy that hedges duration risk is smart. He thinks it’s so smart that he believes it has a place in both domestic and international markets. The only thing holding investors back from reaping the benefits of a strategy like the ProShares High Yield–Interest Rate Hedged fund (HYHG) is an education gap.

FT: – What does the recent pick up mean for bond investors? – Bonds are driven by interest rates, so often do best when people don’t – cheering on the rising bond prices that accompany recession and redundancies is not the best way to make new mates.

Fox Business: – Why I’m bullish on stocks and steering clear of bonds. – In 2013 equity markets through the end of September advanced in most parts of the world to finish with an overall gain of over +15% as measured by the Global Dow (GDOW). The equity markets in Europe, Asia, North and South America all finished in the plus column. Right now I prefer to overweight stocks versus bonds.

Business Insider: – Investors withdrew billions from Jeff Gundlach’s bond fund because of the taper threat. – Clients pulled $2.1 billion from Jeff Gundlach’s $35.1 fund in September, Bloomberg’s Alexis Leondis reports.

ETF Trends: – ETFs help investors navigate changing fixed-income landscape. – Investors are worried about income generation and volatility in the equities market. However, ETFs can help investors diversify and augment yields in their portfolios.

 

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