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The price of Treasury Inflation Protected Securities (TIPS) suffered today after government data showed U.S. consumer prices rose at the slowest annual pace in four years last month, sending the yield on 10-year TIPS to 0.61%, a two-month high.
TIPS are unique among bonds, in that while they pay a fixed rate of interest (which is the real yield), their principal is adjusted monthly for inflation, with everything guaranteed by the U.S. government.
TIPS are a useful barometer for the overall health of the U.S. economy, since they gives us a reliable source for ex ante real interest rates across the maturity spectrum, a window into the market’s inflation expectations, and a gauge for how strong the market thinks the economy is likely to be.
So what are TIPS trying to telling us? Scott Grannis, said on his blog the Calafia Beach Pundit, that TIPS are indicating that “inflation is expected to be low for as far as the eye can see, and the economy is expected to be weak for some time to come.”
Grannis goes on to say that “TIPS today have a real yield of about -0.6%. This suggests that the market worries that economic growth could slip below 2% in the next few years. If growth comes in better than 3%, the real yields on TIPS ought to move substantially higher.”
According to Grannis, this makes equities, real estate, and high-yield debt the place to ride out the storm. By the same logic, cash, Treasuries, TIPS, and MBS are relatively unattractive because real and nominal yields are likely to rise by more than the market expects.
You can read the full article here.
Todays Other Top Stories
Yahoo Finance: – Miami’s muni bonds: Safe or sorry? – Miami is bouncing back from its foreclosure crisis, but CNBC’s Scott Cohn reports the city is at the center of a 4-year SEC crackdown on municipal bonds.
Wall Street Pit: – A Puerto Rico bond investor’s portfolio gets scarier with potential downgrade to junk. – When a UBS Puerto Rico bond investor looks at their account these days, if they have the courage to do so, they are probably staring at losses over the past two months of 50% to 60%.
Reuters: – Fat yields needed for Alabama county deal lure overseas buyers. – A $1.78 billion bond sale by Alabama’s Jefferson County pulled in overseas buyers and other unusual municipal market investors, offering fat interest rates to overcome the taint of a landmark 2011 bankruptcy.
Indexology: – Defaulted municipal bonds outperform! – Hard to fathom isn’t it! With 2013 municipal bond default and bankruptcy headlines casting a dark cloud over the municipal bond market, defaulted bonds actually have been up. The overall performance of defaulted municipal bonds during this time has been positive as the S&P Municipal Bond Defaulted Index has returned a positive 2.79% year to date. Meanwhile, the investment grade tax-exempt market tracked in the S&P National AMT-Free Municipal Bond Index has seen a negative 2.85% return year to date.
MuniNetGuide: – Immigration and domestic migration affect U.S. States differently. – After years of stalemate, it appears likely that immigration will be debated seriously in the U.S. Congress. The current law’s favoring of close relatives rather than employment-related immigration will likely be examined, and eventually changed. Of course, this shift could significantly affect immigration patterns among the states. The 2020 Census tallies will rise for those states that have had large green card applications in the past.
Learn Bonds: – What is likely to dominate portfolio returns over the next 2 to 3 years. – It seems like we are spending a lot of time talking about the future of interest rates and very little time talking about the characteristics of bonds and reasons for investing in the various types of bonds. The reason for this is that the reality of interest rate risk is very great in the current environment and may tend to dominate portfolio returns over the next two or three years. Because of this it is very important for us to understand what forces are working on the financial markets and to understand how the decisions of our policymakers might impact future outcomes.
WSJ: – Fed suggests it would accept Treasurys even if government missed a payment. – Federal Reserve officials suggested they would continue to accept Treasurys as collateral and use them in central bank operations even if a debt-ceiling crisis caused the government to miss a payment on its bonds, according to minutes of an Oct. 16 videoconference call released Wednesday.
SFGate: – U.S. 10-year yields rise to two-month high on Fed taper outlook. – Treasury 10-year yields rose to the highest level in two months as Federal Reserve officials said they might reduce $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting show.
WSJ: – Treasury sells 10-Year TIPS at highest yields since 2011. – The U.S. government had to offer the highest yields in more than two years to sell 10-year bonds that offer protection against inflation.
The Street: – IShares U.S. IG corporate bond index fund (XIG) shares cross 4% yield mark. – In trading on Wednesday, shares of iShares U.S. IG Corporate Bond Index Fund were yielding above the 4% mark based on its monthly dividend (annualized to $0.8843), with the stock changing hands as low as $22.10 on the day. Dividends are particularly important for investors to consider, because historically speaking dividends have provided a considerable share of the stock market’s total return.
SFGate: – Corporate bond spread narrows as Bernanke says rate to stay low. – The extra yield company bonds offer over Treasuries approached the narrowest level in six years as Federal Reserve Chairman Ben S. Bernanke said interest rates will stay low and investors sought ways to boost income.
24/7 Wall St: – Junk bond spreads have tightened handily again. – 24/7 Wall St. has not been covering the junk bond market as much of late because spreads were in a narrow range for quite some time. That was then. The 10-year Treasury note hit a 2.80% yield in the middle of this week and has only just now find buying support enough to bring it back under 2.8% again. This marked the highest yields since mid-September as the worries are growing all over again about when the bond purchasing will begin to be tapered.
CNBC: – Can emerging markets offer inflation protection? – As the world’s main central banks try to battle the threat of stagnant growth and falling prices by implementing inflationary measures, one option for yield available to investors is emerging market bond plays.
MarketWatch: – ProShares launches first short term emerging markets bond ETF. – ProShares, a premier provider of alternative ETFs, today launched the Short Term USD Emerging Markets Bond ETF (EMSH), the first short term emerging markets bond ETF in the United States. The ETF is designed to offer attractive yield potential with reduced interest rate sensitivity.
FT: – Emerging markets: Volatility is part opportunity and part trap. – The U.S. Federal Reserve triggered a storm in developing countries this year when it announced plans to scale back its monetary stimulus. The market reaction was quick, violent and indiscriminate.
FT: – Frontier bonds ride out Fed debt squalls. – Frontier market bonds have proved unexpectedly sturdy in the face of the Fed’s plans to “taper” its quantitative easing programme.
Investment Week: – Strategic bond managers make tactical EMD call after sell-off. – Strategic bond managers are taking short-term positions in emerging market debt after the summer sell-off brought valuations back down to attractive levels.
The Economist: – Investing in frontier markets. – A desperate search for bonds that pay a decent rate of interest and a keen desire for exposure to economies that are still growing quickly have taken rich-world investors to some exotic places. The raciest bets are made in so-called frontier markets, poorer places with even less mature financial sectors than emerging markets. But all may not be as it seems.
Financial Iceberg: – iShares Barclays Treas Bond (TLT). – TLT is starting to trade below 104.70 which means that the dead cat bounce sequence is complete and we will go back testing 103.60. A daily close below that level is very bad technically speaking (Which it did on November 20).
Bond Buyer: – Fund Managers try to boost returns from a dreadful 2013. – After two years of double-digit gains, returns for the Lord Abbett AMT Free Municipal Bond A have tumbled in 2013.
CNBC: – And we’re off: the ‘Great Rotation’ gets into gear. – A ‘Great Rotation’ out of bonds into stocks is only just underway and is setting up to be one of the major investment themes of 2014, strategists say.
Focus on Funds: – Bond managers doing their jobs. – This week’s Focus on Funds video with Jack Otter goes over the evidence that bond-fund managers have a better shot at beating a benchmark than the folks in charge of stock funds.
WSJ: – Long-term mutual fund inflows $1.16 billion in latest week. – Inflows into long-term mutual funds totaled $1.16 billion in the latest week, bolstered by hybrid and equity fund gains that more than offset a decline in bond funds, according to the Investment Company Institute.
Chris Ciovacco: – Fully invested institutions choosing stocks over bonds. – Traders, who can easily move to cash, are quite a bit different than pension funds or mutual funds that have fully-invested mandates. While there is no question in the short-run a 1994-like simultaneous decline in stocks and bonds is possible, longer-term the vast majority of institutions must choose between stocks and bonds.
Cranky: – 22% annual dividend growth: Courtesy of bonds. – What happens when you reinvest the income from dividends and bond ETFs back into the holdings? Here’s a look at how that worked out with equal reinvestment back into the dividend ETFs and the bond ETFs.
Income Investing: – Floating-rate bonds likely to underperform. – With everyone jumping into floating-rate investments like bank loans this year largely out of fear of rising interest rates, Kathy Jones and Colin Martin of Charles Schwab say investors are jumping the gun and will likely pay for it in the form of underperformance.
What the? Bonds and UB actually moving north.
— Arete (@ColinACody) November 21, 2013