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Bond prices strengthened on Thursday after Janet Yellen, the woman the President Obama nominated to run the Federal Reserve, defended the Fed’s stimulus efforts and vowed to continue them if confirmed as Chairman.
In her first appearance in front of Congress, she said the Fed’s $85bn a month bond-buying programme was a “meaningful contribution to economic growth”.
If confirmed Ms Yellen will take over the chairmanship of the bank once current incumbent Ben Bernanke’s term ends in January. Her conformation is thought to be something of a formality, since neither democrats nor republicans have voiced any opposition to her appointment. To be successfully nominated she requires 60 votes.
Yellen handled her first, of what will no doubt be many meetings, with the Senate Banking Committee with ease, appearing calm despite the range of questioning. Through it all, she reaffirmed her commitment to continue the current Fed’s extraordinary stimulus measures. Which involve buying $85 billion worth of bonds in a month, in an effort to keep interest rates low.
This is just what the bond market wanted to hear. After the announcement, the December 10-year bond futures contract was trading at 95.850 (with a yield of 4.150%), up from 95.785 (4.215%) on Wednesday, while the December three-year bond was at 96.890 (3.110%), up from 96.830 (3.170%).
The general perception of the market is that Yellen is slightly more dovish than the Federal Reserve board as a whole. Which should mean that a December “taper” is not on the cards. It remains to be seen if taper speculation remains however.
Todays Other Top Stories
BondBuyer: – Muni watchers view hedge fund presence, liquidity favorably. – Investors in municipal bonds are mostly pleased that hedge funds have increased their bets recently in distressed state and local government debt.
Reuters: – American Airlines muni bonds take flight for U.S. mutual funds. – Debt issued on behalf of a bankrupt airline has turned into one of the unlikeliest winners on the U.S. municipal bond market.
MuniNetGuide: – Do hedge funds belong in the municipal market? – Traders returning from the Veterans Day holiday are facing a much weaker tone in fixed income as the market continues to digest the implications of last Friday’s blowout employment report. The yields on the benchmark 10-year and 30-year Treasury bonds continue to push upward to around 2.78% and 3.86%, respectively.
WSJ: – Saving a client’s retirement plan from himself. – A man in his late 50s was convinced he had the perfect plan: He would retire in four years, move to another state and live on an annual budget of $300,000. The man was sure his plan was foolproof, but he went to Lisa Fox to check his projections.
ETF Trends: – Bad news confirms the utility of this muni ETF. – U.S. stocks keep racing to record highs. Money is pouring into exchange traded funds, particularly the equity-based variety and to the untrained eye, all would appear to be well as year-end nears.
Learn Bonds: – If the smart money is selling, should we be buying? – When new issues become as massive as they are today, can it mean that markets are overheating and getting ready to give back some gains?
FT Adviser: – How high could US interest rates go? – From May – when the Federal Reserve announced its intention to reduce its quantitative easing programme – to the start of September, yields on 10-year US government bonds increased from 1.66 per cent to almost 3 per cent. They are currently at roughly 2.6 per cent. This shows the market continues to anticipate a tightening of monetary policy. Early indicators suggest that the Fed will resume tapering at the end of 2013 or beginning of 2014.
Financial Planning: – Bond worries? What advisors should do. – Many experts now believe bonds are riskier than stocks and warn of a bond bubble ready to burst. A better understanding of both the likelihood and impact of such a bubble would have clear implications for advisors, who must face two key questions: how much bond exposure clients should have, and whether it is prudent to shorten durations to soften the impact of rising rate.
WSJ: – Treasury bonds rebound from two-day selling. – U.S. Treasury bonds rallied as buyers returned after two days of selling, boosting demand for an auction of $24 billion in benchmark 10-year notes. The rise in bond yields on Monday and Tuesday drew in buyers who believe that the Federal Reserve won’t be in a rush to raise interest rates even if it moves to dial back bond buying in coming months.
MoneyNews: – Pimco’s Gross: Fed needs private market to take over QE purchases when it tapers. – Now that financial markets have become addicted to the Federal Reserve’s quantitative easing, it will be difficult for the central bank to withdraw the stimulus, says Bill Gross, co-chief investment officer of fund giant Pimco.
FT: – Corporate default risk models are broken. – Half a decade of loose monetary policy in the US has produced a curious reaction in the risk analysis models that attempt to forecast the rate at which the country’s companies will default – the models have gone mild.
FT Adviser: – How can corporate bond investors protect themselves? – The macro backdrop is not brilliant, but it’s not a disaster either. Economic activity has shown some signs of improvement in Europe and the US, although regular risk flare-ups such as the US government shutdown are hardly encouraging.
Business Standard: – High yields push investors away from corporate bonds. – The corporate bond market is becoming unattractive for investors, owing to high yields. Now, big investors, including fund houses, insurers and banks, are exiting investments in this space and investing more in government bonds.
Reuters: – BlackRock turns to regional and community banks in ETF push. – lackRock Inc, a money manager that has long worked with the largest U.S. financial institutions, is now turning to the country’s smaller banks, where it sees a promising market for exchange-traded corporate bond funds.
Financial Post: – Why corporate bond liquidity is becoming a problem. – Asset managers building big stakes in corporate bonds could be left hanging as banks cut back on providing liquidity, increasing the risk of chaotic selloffs should interest rates spike from record lows.
FT: – Record sales of lowest rated bonds. – Global borrowers with weaker credit quality are taking advantage of investors’ relentless search for higher yields to sell a record amount of bonds so far in 2013.
IndexUniverse: – Clark on floating debt vs. high yield. – Historically low interest rates, accompanied by an unprecedented investor desire for income generation, have catapulted floating-rate debt instruments to take center stage in the search for yield. But how do they compare to traditional high yield debt?
WSJ: – Turmoil hits Venezuela bond prices. – Venezuelan bond prices have collapsed more than 10% over the last three days as the government threatened to impose harsh controls on the economy to arrest the world’s highest inflation rate.
TheStar: – Emerging economies, including M’sia may suffer more from U.S. taper. – Emerging markets are likely to see considerably more impact from higher U.S. interest rates when the Federal Reserve pulls back from its massive monetary stimulus, World Bank President Jim Yong Kim said on Tuesday.
Citywire: – Neil Woodford, emerging markets and QE black holes. – In this video, Neil Woodford talks about the prospects for emerging markets, and their bonds in particular, as the U.S. looks toward tightening monetary policy?
FTSE Global: – Catastrophe bond market soaring says BNY Mellon. – The number of catastrophe or cat bonds outstanding could more than double from the current level of $19bn to $50bn by the end of 2018, according to a report from BNY Mellon.
Batalyst: – AllianceBernstein’s global high income fund isn’t that attractive to buy. – I’ve seen a couple of articles recommend AWF and I wanted to provide my coverage view and position on this closed end fund. The purpose of this article is to highlight AllianceBernstein Global High Income Fund, an income closed end fund that could offer an investor’s portfolio solid monthly income, a high yield, an efficient expense ratio, and diversification (against an equity heavy portfolio or a basket of equity heavy closed end funds).
InvestmentNews: – Beginner’s luck? Edward Jones’ first fund was October’s top seller. – The Bridge Builder Bond Fund (BBTBX), the firm’s first proprietary fund, was launched on Oct. 28 and promptly received $2.8 billion in inflows, according to Morningstar Inc. That’s more than any other single mutual fund received during the month and twice the net inflow of the $11.7 billion Goldman Sachs Strategic Income Fund (GSZAX), the next-best-selling bond fund.
Wealth Management: – Fidelity rolls out new funds as antidote to interest rate shocks. – Fidelity Investments, the second-largest U.S. mutual fund company, on Tuesday rolled out three new funds to help investors sidestep the interest-rate shock that is expected when the Federal Reserve unwinds its easy money policy.
MarketWatch: – What my grandson needs to know about ‘I-Bonds’. – This year I decided to give each of our 13 grandchildren money with a recommendation that they use it to buy Savings I-Bonds to start saving for emergencies or the fixed-income part of a retirement allocation. I told them that they have to buy them through TreasuryDirect.gov, which offers lots of information about government bonds.
Moneycontrol: – What steps can retail bond holder take if company defaults? – Does a bondholder have any rights? You make it pretty clear that if bond does sink it appears that there is very low chance of any kind of redress and if the companies possessions are appropriated by the banks, the lenders etc the money coming to the bond fund investor is not a priority. Is that correct?
Weak 30-yr Treasury auction demand after strong 10 and 3yr in prior days. 30yr results sapping strength from modest rally today
— AnthonyValeri (@Anthony_Valeri) November 14, 2013
As a bond guy I'm probably naturally a bit bearish but it's surprising how pervasive a negative economic outlook has become lately
— David Schawel (@DavidSchawel) November 14, 2013