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Federal Reserve chair Janet Yellen got traders excited last week when she hinted that interest rates may rise sooner than previously expected. A scenario that could spell disaster for bonds.
Following last weeks Fed meeting, Yellen said it would factor in a wide range of economic measures as it judged the correct timing for raising rates.
Yellen comments were immediately interpreted as the precursor for rate hikes that would come sooner than expected.
“We have to consider the possibility of the first rate hike coming in April 2015,” James Knightley of ING told investors. “Market pricing is still favouring the third quarter of 2015, but a decent rise in employment and business activity may see this change,” he said.
While Rick Rieder, chief investment officer of mega money manager BlackRock’s Fundamental Fixed Income group, said at a media briefing the day after Yellen’s remarks that “Investing in fixed income today is almost the exact opposite of what it was last year,“
That means, opportunities in longer-dated bonds, likely some minor moves in shorter-dated maturities, and danger in the so-called belly of the curve around the three- to seven-year duration.
Rieder thinks longer-dated bonds will stay strong as the Fed continues the gradual pullback of a monthly bond-buying program that had its greatest focus at the short end of the curve.
“The distortion last year was in the long end of the curve,” he said. “The distortion today is in the front end of the curve.”
And he’s not the only one. Jason Shoup, Citigroup’s head of U.S. investment grade credit strategy, said the Fed has a difficult road ahead but believes the landscape could provide good opportunities in high-grade bonds.
“At the short end, it’s the consensus nature of the position that we find alarming given interest rate volatility in the front end looks set to climb on the back of Fed guidance,” Shoup said in a note. “Frankly, after (last) week’s Fed meeting it now seems as if Yellen’s reign might produce an upset or two.”
Todays Other Top Stories
Reuters: – Lipper winners answer the muni bond riddle. – One could forgive municipal bond investors for being confused. While the average muni bond was down 2.6 percent in 2013, making it one of the worst-performing bond sectors this year, munis are already up 3.1 percent through March 19, making it one of the best.
Reuters: – Prisons and an airport to dominate $4.9 bln muni week. – Two large municipal bond deals for prisons in California and an airport in Atlanta will make up over a third of the $4.87 billion in new issuance next week as deals remain subdued for a second week running.
Pittsburgh Post: – Municipal bonds making welcome comeback. – The dynamics are improving for municipal bonds, which were beaten down so badly last year that they posted their worst returns in nearly two decades.
Go Eire: – Bond rating important indicator of financial health. – With many cities nationwide struggling with massive pension debt, depleted cash reserves and other liabilities, the municipal bond market “has gotten cautious. … Mostly what we see right now is cities being lowered in their bond ratings,” said Michael Coulter, a political science and public policy professor at Grove City College.
Bloomberg: – Atlanta airport saves in $706 million debt offering. – Hartsfield-Jackson Atlanta International Airport, the world’s busiest, plans for even more passengers to throng its terminals, which may benefit bondholders.
BusinessWeek: – Puerto Rico deal deemed risky still sold to individual investors. – The biggest rally in high-yield municipal debt in five years is luring individuals to Puerto Rico’s $3.5 billion deal, even as the commonwealth seeks to keep them away because the securities are so risky.
LearnBonds: – Check out these 5 brand new 10-year bonds. – In recent weeks, numerous companies have issued brand new debt with maturities ranging from just a couple of years all the way out to 30 years. For readers who don’t have easy access to up-to-date bond information, I’d like to share a selection of the recently-issued intermediate-term notes now trading on the secondary market.
4 Traders: – Treasury bonds set for weekly price losses. – Treasury bonds edged higher Friday but still headed for weekly losses amid worries that the Federal Reserve may raise short-term interest rates sooner than many investors anticipate.
Express Tribune: – Govt bonds: Investors switch focus to longer-term papers. – And the verdict of Pakistan’s bond market is loud and clear: the central bank is going to cut the key interest rate by at least 50 basis points to 9.5% in the next policy announcement in May. Here is how the changing investment pattern in the bond market points to an imminent discount rate reduction.
Investing.com: – Are Treasuries poised to rally? – Fed chairs are under intense scrutiny for their utterances. I can remember an interview with Paul Volcker who said that he felt so much under the microscope that when he went out to a restaurant, he felt compelled to say, “I’ll have the steak, but that doesn’t mean that I don’t like the chicken or the lobster.”
Investing.com: – Shifting focus in the Treasury markets. – Treasuries once again experienced what amounts to a sharp curve flattening in recent days. The market action resembled what took place after the initial announcement of taper back in December. The yields in the “belly” of the curve have risen sharply as the market prepares for rate “normalization”.
Bloomberg: – Two-year note drops as investors bet Fed on track to raise rates. – Treasuries fell, pushing yields on two-year notes to the highest since September, on speculation the Federal Reserve will end stimulus and raise interest rates sooner than investors forecast as the economy strengthens.
WSJ: – Treasury prices down on rate worries. – U.S. Treasury prices edged down on Monday, snapping a two-day winning streak, as investors continued to worry over the Federal Reserve’s next move on interest rates.
WSJ: – Treasury prices bounce back despite rate worries. – Treasury bond prices bounced back Monday as some investors adjusted their positions on concerns over the Federal Reserve’s next move on interest rates.
FT: – Global banks race to issue debt in first quarter. – Global banks have been aggressive borrowers in the first quarter of 2014, taking advantage of low funding costs and demand for high-quality corporate debt to push bond sales in the US to record levels.
Bloomberg: – Number of risky issuers signals low default rate, Moody’s says. – The number of U.S. companies at greatest risk of failing to repay debt obligations is holding at about the average of the last two years, signaling that the default rate will remain suppressed, according to Moody’s Investors Service.
Income Investing: – Junk bond risk-reward ‘not attractive’ amid rate volatility. – Citi credit strategists Michael Anderson, Angel Jia and Lina Lavitsky today look at the high-yield market’s stability during this week’s Fed-induced market hiccup. Citi says high yield’s resiliency is unlikely to be sustained, saying investors “should recalibrate their expectation of monetary support after this week’s meeting.”
FT.com: – Bondholders’ rights and returns diluted. – Could the days of equity-like returns from high-yield bonds be over? Recent modifications to the terms of issue may represent a significant change to the market, so that investors will have to change their approach to the asset class.
Gary Shilling: – Buy sheep, avoid goats of emerging markets. – Since the start of 2014, investors have fretted over emerging markets. And they should. Early in this economic recovery, investors repelled by low returns in the developed world leaped for the stocks and bonds of emerging markets, whose markets promised faster growth.
FT: – China woes yet to scare off bond investors. – Another week, another batch of weak economic figures out of China – this time from the manufacturing industry.
Barron’s: – Go active for bonds, but index your stocks. – Much ink has been spilled in the active-versus-passive debate, and there’s no shortage of academic research in the mix—most of it demonstrating that very few active managers consistently outperform their benchmarks.
JS Online: – Now is not the time to bail on bonds, Robert W. Baird executive says. – It might be tempting to abandon bonds, but it wouldn’t be prudent, says a fixed-income analyst at Robert W. Baird & Co.
FT Adviser: – Now is not the time to go with the herd. – Across both investment grade and high yield in the US, the most important aspect at the moment is to manage interest rate risk appropriately – given the potential effects of Federal Reserve tapering.
Bloomberg: – SEC said examining hidden electronic bond trading prices. – The practice of dealers showing clients different prices for the same securities on electronic bond-trading platforms is drawing the scrutiny of the U.S. Securities and Exchange Commission, which is concerned that smaller investors are being penalized.
News Observer: – Andrew Silton: How to evaluate pricing, performance of less liquid mutual funds. – Over the past year, most of you have enjoyed perusing your brokerage or 401(k) statement because the balances are rising. While you may not yet have enough money to retire, at least you have more money than you had a year ago.
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MacLean: OCC “no exceptions policy” for aggressive loans, yet they persist. PIMCO credit research helps protect investors from market froth.
— PIMCO (@PIMCO) March 24, 2014
5s30s at a 4+ year low of 184bps
— David Schawel (@DavidSchawel) March 24, 2014
Interesting thought experiment: How would Detroit’s BK be different if none of the obligations were insured?
— Bond Girl (@munilass) March 24, 2014