This Week’s Top Bond Market Stories – September 20th Edition

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LearnBonds: – Bank of America’s newest preferred stock yields 6.625%. – When deciding whether to purchase BofA Series W preferred bonds at their recent level of $24.84 (yield of 6.67%). The following two things should be near the top of one’s thought process.

LearnBonds: – Making sense of forward guidance and an “extended period” – One of the more effective actions taken by the Fed was extending forward guidance. This was when the Fed said it would keep rates low for an “extended period of time.” However, the Fed has hinted it might shift to a data-based guidance model in the near future, what does this all mean?

LearnBonds: – In search of bond alternatives. – Last week I discussed the similarities between triple net real estate investment trusts (REITs) and bonds. While I think bond investors looking for predictable cash flows can certainly look at equities to complement fixed income holdings, it’s probably not appropriate to view them as substitutes. There is inherently more capital risk in owning stocks.

LearnBonds: – Forward guidance says rates to remain as-is for an “extended period”. – Signals coming from the Federal Reserve System in the United States suggest that short-term interest rates will remain at or close to current levels until the middle of 2015.  The effective Federal Funds rate, the policy rate of the Federal Reserve has averaged around nine basis points for most of this year.

LearnBonds: – FOMC decision both hawkish and dovish. – Wednesday’s Fed’s statement, as well as Ms. Yellen’s comments, was sufficiently ambiguous that one could interpret them as either more dovish or more hawkish simply by focusing on one sentence or another. Judging by the markets’ responses, it appears as though equity market participants consider the comments to be more dovish while fixed income market participants seem to view Fed language as more hawkish. The truth is that they could be interpreted as both hawkish and dovish when viewed in the context of potential scenarios.



Municipal Bonds

Bloomberg: – Puerto Rico said to plan $900 million note offer in 30 days. – Puerto Rico plans to sell $900 million of tax- and revenue-anticipation notes within 30 days, according to a person with knowledge of the sale, marking its first foray into the municipal-debt market since March.

Bond Buyer: – Muni funds can take the spotlight by buying green. Municipal bond fund managers are finding they can stand out from the competition and lure new investors by taking advantage of this year’s flood of green bonds.

Business Insider: – RICH BERNSTEIN: There’s only one part of the bond market I like. – As mentioned, investors may be underestimating the risks of non-US debt and over-estimating the risks associated with high yield munis. Through time we have found some startling mispricings between these two asset classes. Our current example certainly fits that description.

MoneyNews: – Detroit authority approves $450 million muni bond deal for arena. – A $450 million bond sale to finance a Detroit hockey arena neared final approval with consent of the city taxing authority that will help pay for it.

Reuters: – U.S. Treasury will monitor bank liquidity rule’s impact on munis: official. – The U.S. Treasury will monitor the impact of a recent bank liquidity rule on the cost of new municipal debt issuance, a federal official said on Wednesday.

BondBuyer: – SEC could halt muni bond sales. The Securities and Exchange Commission will probably use emergency court action to stop state and local governments from selling municipal bonds if it thinks their offerings are fraudulent, an enforcement division official told bond lawyers meeting here.

Bloomberg: – Biggest bond glut of ’14 imperils record debt rally. – It takes a nationwide effort to halt the $3.7 trillion municipal-bond market’s record winning streak.


Bond Market

Bloomberg: – Pimco says no Canada bear bond market as Poloz tightens. – Canadian bond investors will avoid a bear market with the central bank likely to raise interest rates at a gradual pace as the economy strengthens, according to Pacific Investment Management Co.

Bloomberg: – Bond market dispels inflation alarm as Fed winds down QE. – As the Federal Reserve winds down its third round of unprecedented stimulus, one thing has become increasingly clear in the bond market: the U.S. economy just isn’t going to grow enough to upend demand for Treasuries.

About.com: – How to protect your assets in a bond bear market. – A bond bear market is by no means a sure thing. Still, two outcomes are highly likely from here: bonds are unlikely to deliver returns in the next ten years that they did in the past ten, and volatility will increase significantly. To that end, here is a defense kit to help you weather a downturn, with history and background, investment ideas, and thoughts on the bond market segments best avoided.

FT: – Investors shun US inflation bonds. (Subscription required) Investors are shunning US inflation bonds as a stronger dollar and lower commodity costs negate the need for owning insurance against the risk of rising consumer prices.

MarketWatch: – Are stock and bond traders really reading Fed differently? – Bond traders look at Janet Yellen and see a central bank chief ready to raise rates next year at a slightly faster pace than previously imagined, while stock investors supposedly see a dove, more worried about a weak job recovery.


Treasury Bonds

Bloomberg: – ETF Investors snap up long-term Treasuries on Fed inflation view. – Longer-term Treasuries, posting the strongest returns since 2011, are luring investors in exchange-traded funds at the expense of shorter-term debt on speculation the Federal Reserve will tighten monetary policy and hold inflation in check.

Reuters: – Bargain hunters push up prices on drooping data. – U.S. Treasury debt prices broke a slide and rose on Monday as bargain hunters bought on signs of spotty economic growth, which might slow the Federal Reserve’s shift away from loose monetary policies.

Bloomberg: – Treasuries advance as consumer prices drop before Fed. – Treasuries advanced after a reports showed the cost of living in the U.S. unexpectedly dropped in August as the Federal Reserve decides on the future path of interest rates in a policy meeting today.

FT: – Yield-hungry markets overlook credit risk. (Subscription required) Three years ago, the US lost its top-tier triple-A credit rating and markets were plunged into turmoil. In 2014, the vast majority of US companies are migrating down the credit ratings spectrum and investors are barely batting an eyelid.

WSJ: – U.S. government bonds rise after two days of selling. (Subscription required) Treasury bonds strengthened Friday for the first time in three days as higher yields attracted buyers.


Investment Grade Bonds

Bloomberg: – Look out for Volcker in illiquid market already feeling squeezed. – The difficulties that traders are having maneuvering in the $10 trillion U.S. corporate-bond market may be poised to get worse.

Donald van Deventer: – Comparing the marginal cost of funds for Berkshire Hathaway, Wells Fargo and Bank Of America. – Today, we show that Berkshire Hathaway has a marginal cost of funding below both banks. With tongue partly in cheek, both banks could reduce their marginal funding costs by giving up the implicit TBTF USA guarantee for an explicit Berkshire Hathaway guarantee.

WSJ: – Smaller firms taking corporate bond dealing share from top banks. – The top five banks dealing in U.S. corporate bonds have lost market share to smaller firms, according to figures from researcher Greenwich Associates, the latest sign of the financial-sector shake-up being driven by tougher rules and bank retrenchment.

IFR Asia: – Fed slows U.S. high-grade issuance but Alcoa slips through. – The much-awaited Federal Reserve statement kept a lid on US high-grade issuance Wednesday, as borrowers largely stayed away to avoid any rates volatility.

Businessweek: – Deutsche bank sees $300 billion stash debunking credit doomsday. – It’s natural for bond buyers to be pessimists. It’s part of their DNA. But they’re taking the whole role of worrier too far by giving in to the pervasive concern that a credit-market Armageddon is coming, according to strategists at Deutsche Bank AG.


High-Yield Bonds

David Stockman: – Wall Street at work aggravating risk—would you like some leverage on them junk bonds? – Once upon a time junk bonds yielded 12-15% on a regular basis and not without reason. After accounting for average losses of about 5% on a long term basis—plus inflation, taxes, illiquidity and real returns—-double-digit yields made good sense financially. How times have changed.

Forbes: – U.S. high yield bond issuance nears $11B in uneven market. – Despite a handful of shelved offerings amid a more deliberate investor market, U.S. high yield bond issuance racked up $10.7 billion in volume last week, after a healthy $11.6 billion recorded the previous week, according to S&P Capital IQ/LCD. Year-to-date volume now stands at $230 billion.

IFR Asia: – Burger King readies bond financing for Tim Hortons buy. – US fast-food chain Burger King will this week begin marketing a much-awaited US$2.25bn high-yield bond to help finance its US$11.5bn acquisition of Canadian doughnut group Tim Hortons.

About.com: – How likely is a high yield bond market crash? – Assessing the potential for severe downside in the financial markets is never easy, since crashes are so few and far between. Much more often than not, investors who position their portfolios for declining asset prices just end up missing out on upside without ever providing any true degree of protection.

Smarter Investing: – The case for investing in high-yield bonds now. – High-yield debt or “junk” bonds have gotten more attention from income-starved investors in recent years due to rock-bottom interest rates.


Emerging Markets

Financial Post: – Emerging markets may evade Fed rate rout. Just as vaccines work by stimulating the body’s immune system, last year’s selloff may have helped emerging markets build defenses against the damage they have suffered during past U.S. rate rise cycles.

Financial Planning: – Advisors weigh pros & perils of emerging market bonds. – Emerging markets bond funds topped all fixed-income categories with a 10-year annualized return of 8.3% through last month, nearly double the 4.4% return of domestic long-term bond funds, according to Morningstar.

Citywire: – Sanctions threat leads EMD star to cut emerging Europe bets. – Threadneedle’s Zara Kazaryan has reduced her exposure to emerging Europe bonds, as she believes the region will continue to be negatively affected by sanctions against Russia.

AllianceBernstein: – In EM, beware commodity riches without policy smarts. – Fixed-income investors often divide emerging markets into commodity exporters and commodity importers. We think this overlooks an important reality: commodity wealth is not the sole—or even the most important—driver of EM performance.


Catastrophe Bonds

WSJ: – Reinsurers lose twice in low-yield world. – Success for esoteric deals is a sure sign there is too much money in a market. So a tightly priced bond that helps insure a German lottery company against too many winners is worrying for the world of catastrophe coverage.


Investment Strategy

Potrero View: – Investors should be wary of long-term bonds. – It’s a bad time to own or buy bonds, such as fixed coupon bonds with mid- to long-term maturities, which include the most common type of bonds, U.S. Government Treasuries. Why should bonds be avoided? Mainly because there’s a high probability interest rates will rise over the next couple of years.

Gary Gordon: – Bond ETFs: Selling the rumor, buying the news. (Registration required) After three years without corrective activity, some folks may be shunning the shares of corporations that tend to suffer the most in downdrafts. If the global economy is weakening – if the weakness is likely to drag on U.S. corporations – then what is the justification for buying more U.S. stock?

Citywire: – Going for gold in global bonds: three managers to watch. (Registration required) Citywire Global uncovers the fixed income specialists posting ratings-worthy performances in the global bonds sector this month.

InvestorPlace: – 3 ways you can use ETFs to cover your butt. – Worried about additional volatility and a drop-off in the coming months? Look to these strategies for help.


Bond Funds

Bloomberg: – Bill Gross used $45 billion derivatives to lift fund gain. – Bill Gross is relying on derivatives rather than Janet Yellen to raise his returns on government bonds.

Investing.com: – Will 2014 be the tipping point for active ETFs? – The pace of new actively managed ETFs being released to the market has continued to heat up this year.  Of the 106 total ETFs that are designated as active by the SEC, 35 have been released this year and many more are planned in the near future.

Zacks: – PowerShares adds laddered bond ETF to suite. – Though interest rates are currently at ultra-low levels, concerns over interest rates rising earlier-than-expected are looming large. This is especially true, as the U.S. economy is building up momentum with accelerating growth and a strengthening job market that led the Fed to wind down its bond-buying program completely by October.

MoneyBeat: – Vanguard reaches $3 trillion in assets, matching entire hedge-fund industry. – An asset manager selling index funds from a leafy suburb of Philadelphia now has about the same amount of assets under management as the entire hedge fund industry.

MarketWatch: – Assessing the end of the Fed’s easy money regime’s impact on ETFs. – The primary capital market for bonds is for original sales of debt securities directly from issuers to purchasers. Bond sales could either be made by the government to finance its debt or by corporates wishing to undertake debt for a variety of reasons, including funding investments and acquisitions.


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