Bonds 01 (May 08 - Aug 10)

[winston]

Pimco Turns to Buying Junk Bonds for Better Returns By: Dan Weil

Money management titan Pimco is dipping into the junk bond sector, seeking higher yields in an environment of historically low interest rates.

“We believe 2010 is going to herald a return to an environment in which returns will be dominated by coupon income,” Pimco portfolio manager Andrew Jessop, said in a commentary on the firm’s Web site.

Junk bond yields averaged about 9 percent at the beginning of the year, he notes.

“This suggests that if there are . . . balanced upside and downside risks for this sector, as Pimco believes, the high yield market could potentially provide high single to low double digit returns in 2010,” Jessop said.

While that wouldn’t match last year’s record return of 58 percent for the Bank of America-Merrill Lynch High Yield Master II Index, it’s still an impressive result given the current uncertainty in financial markets.

Jessop said default risk for companies that have issued junk bonds should total less than 3 percent this year. That’s because most of the huge amount of high-yield debt issued last year doesn’t mature until at least 2012.

In addition, credit rating agencies have been slow to award ratings upgrades to deserving junk bonds, Jessop says.

While high-yield debt could be safe for now, Bank of America sees trouble looming ahead.

“This (wave of high-yield debt coming due after 2011) could result in additional default pressures further down the road,” according to a BofA report obtained by Bloomberg.

http://moneynews.com/StreetTalk/Pimco-B ... /id/351977

[winston]

Municipal Bonds

Tison's Fiasco: Your Money's at Risk and You Don't Know It. By Dr. Steve Sjuggerud

I walked the streets of Tison's Landing yesterday...

I admired the incredible neighborhood center for the use of residents, complete with soccer fields and the largest, most fully stocked playgrounds for kids I've ever seen.

From the gaslamp-style streetlights to the manicured public gazebos, no expense was spared. The residents of the 680 homesites across 200-plus acres would no-doubt love it...

The thing is, there are no residents.

Tison's Landing, as I'll explain, highlights the hidden danger of investing in municipal bonds...

Municipal bonds are typically pitched to investors as "safe as money under your mattress." But as the Tison's Landing story will show... they're not safe right now.

Local governments ("municipalities") issue municipal bonds. The big attraction municipal bonds offer is tax-free interest. And they often serve a useful purpose. For example, your county can borrow money to build a toll road (through a municipal bond offering). When it does, it promises to pay back the lenders out of the road's tolls over the next decade or two. Simple.

A toll road makes sense... But does it make sense for a municipality to back a property developer? That's what's going on at Tison's Landing, and hundreds of other property developments like it in Florida.

The basic idea was, the property developer would raise money to put in all the infrastructure (utilities, roads, and so on) through a municipal bond. The investors in the municipal bond would first collect interest from the developer, and then the residents once houses were sold.

The problem in Tison's Landing is, the developer stopped paying interest. And there are no residents. So there's nobody to pay the interest on the municipal bonds...

The photo above tells the story. All the infrastructure is in at Tison's Landing... electricity, water, streetlights. You can even see one of those community "gazebos" in the background. The empty lots literally go back as far as the eye can see. If I turned around and took another picture, it would look the same. There are 680 lots in all.

Municipal bonds paid for all of this. But municipal bondholders are not collecting interest anymore.

Who holds these bonds? YOU DO.

Mutual funds and pension funds are the usual holders. So in your retirement account, you probably own a stake in Florida "dirt bonds" like those of Tison's Landing.

Fund managers are selling these bonds at a 70%-plus loss in principal value now. They'd rather take the loss than take over the property and wait for a rebound. But it's not the fund managers taking the loss... it is YOU... the investor.

"We're managers of municipal bonds, not real estate people," one fund manager told Bloomberg news earlier this week about his Tison's Landing bonds. "We thought about foreclosing but decided the risks were too great."

Explaining why he sold at a big loss, he said: "We can't just write checks for development costs... If you have a $10 million bond that someone offers $5 million for, there's value in cutting and running and re-investing that cash in a solid project."

In the latest issue of my True Wealth newsletter, I recommended selling our position in municipal bonds. Readers pocketed a 13% profit in 13 months. About half of that profit was in tax-free dividends.

Specifically, I told my readers: "Municipal bonds are no longer smart to hold. We don't know which town will explode next. And we don't want to be holding that town's bonds... especially to earn tiny rates of interest."

I recommend the same for you now... Many more municipalities will go bust. The tiny rate of tax-free interest you earn on municipal bonds today is not worth the hidden risks. You could have a portfolio full of Tison's Landings, and not even know it.

Don't be lured in by the tax-free interest rate. Stay away from municipal bonds.

Source: Daily Wealth

[winston]

US Bonds

Bonds had another interesting day. All of the markets were trading very strangely. Early in the morning, bonds were selling and the yields were rising up to 3.76%, above a 3.73% close on Thursday. As the session progressed, however, bonds reversed. They rallied back and the yield fell below 3.7% intraday. By the close, however, they sold just a bit and closed at 3.70%.

Bonds still held gains on the session, and a move into bonds would suggest worry about the economy. Even though the Fed says it will eventually start raisings rates, there was back and forth all day. Was it the fact that Janet Yellen may be put forth as the Vice Chair on the Federal Reserve (and she is considered a dove by many)?

There were many undercurrents today, so it was hard to figure out what was going on. It was not the end of the month, it was not expiration, and yet there was a lot of movement in the other markets. We will have to see how it plays out, but bonds were stronger. Pushing yields lower, they held at the bottom of this range. I am a big believer in the bond market foretelling the future.

If bonds continue to strengthen, despite the Fed's jawboning that they will have to raise rates, then there is something they are concerned about. We will just have to see what it is. There was talk back and forth on Capitol Hill about the healthcare bill. It will look like things are going well, and then there is a move back with people still peeling away from voting for the bill. It is an ebb and flow, and maybe some of the market gyration is related to that.

Looking at some of the individual stocks and the healthcare plans, they bounce higher one day to sell off the next day. This will be a huge bill, regardless of what side of the fence you are on. It is so expensive and will affect so much of the American economy. In any event, we saw a lot of back and forth in many different markets on Friday and, while that may just be end-of-the-week juggling and position shuffling, there was no reason in the market for them to be so volatile.

Source: MarketFN.com

[winston]

US Bonds

Bonds sold off after rallying earlier in the week after the FOMC meeting. That caused the 10 year to rally, and it reached down to 3.64% in the week, but the yield has rebounded as bonds sold back.

Indeed, the 10 year closed at 3.7% on Friday, back where it started from earlier in the week. That keeps bonds in their range. The Fed said it will keep rates down forever, but then India raised rates.

That created the rumor on Friday that the Fed would raise the discount rate again, as it did between the last two meetings. With that in mind, bonds sold back. Investors were just playing a guessing game with what the Fed will do. Bonds are definitely stuck in a range right now.


Source: MarketFN.com

[winston]

THE CANARY IN THE COALMINE?

Over the course of the last year we have witnessed one of the greatest mean reversions in the history of markets. And it hasn’t been unique to the equity markets. In fact, many of the moves in other markets have been even more remarkable than the oft cited 70% rally in equities. As prices have surged we have seen a remarkable calm come across the market as investors reach for risk no matter the news (this has become particularly apparent in recent weeks).

Some view this as a sign of optimism taking hold as the recovery expands. Others view it as a sign of investor complacency as the underlying problems from the credit crisis remain unsolved.

In a recent note, Harley Bassman of Bank of America/Merrill Lynch referred to the many positives, but was quick to note the “canary in the coalmine” – the MOVE index. As Mr. Bassman described, the MOVE index is the bond market’s equivalent of the VIX. He refers to it as the “best gamma volatility index”.

Bassman says the recent collapse in the index is “worrisome”. The index has fallen 80% from its post-Lehman highs. Bassman notes the tendency for the index to trade between 80 and 120 with 80 representing extreme complacency and 120 representing extreme fear. Moves to extremes, however, are fairly rare. As can be seen, moves below 80 preceded the 91 recession, the Nasdaq Bubble and the recent credit crisis. The most recent reading of 76 once again implies an extremely high level of complacency:

http://pragcap.com/the-canary-in-the-coal-mine

[LenaHuat]

Last nite's lukewarm response to auction of 5-year treasuries could be harbinger for tough love soon.
PIMCO must be losing clients.

[winston]

Interest Rates Surge After Weaker Treasury Auction

Interest rates surged in the bond market Wednesday after a government debt auction drew only tepid demand for a second day.

The disappointing turnout for the Treasury Department's $42 billion auction of five-year notes raised the prospect that investors' appetite could be waning for Washington's IOUs. If demand for debt drops, the government would be forced to pay higher interest rates to attract investors.

The drop in prices sent yields charging higher. The yield on the five-year note rose to 2.59 percent in late trading from 2.42 percent Tuesday. Its price fell 25/32 to 98 31/32.

The yield also soared on the benchmark 10-year Treasury note maturing in February 2020. That could translate to higher costs for consumers because the 10-year yield is linked to interest rates on mortgages and other consumer loans.

The 10-year yield rose to 3.86 percent from 3.69 percent. The yield had moved between about 3.55 percent to 3.80 percent in the past two months. Its price dropped 1 11/32 to 98 3/32.

A measure of demand at the five-year auction was weaker than it had been earlier in the year. The bid-to-cover ratio came in at 2.55, compared with 2.75 at an auction in February and 2.80 in January.

Most Treasury auctions this year have brought strong demand, and analysts say a few weak auctions doesn't necessarily mean that demand will continue to fall long term. An auction Tuesday of $44 billion in two-year notes also saw demand slip from earlier in the year.

Investors were already cautious ahead of the five-year auction because of Tuesday's results. Prices extended their slide after the government announced the latest results.

David Coard, director of fixed income sales and trading at the Williams Capital Group, L.P. in New York, said investors could be showing their concern about the amount of debt governments are taking on. That includes the so-called sovereign debt of the U.S.

"I always hesitate on the basis of a couple of auctions to think that there is a sea change," he said. "But it could very well be that people are shying away from sovereigns in general."

The government plans to auction $32 billion in seven-year notes on Thursday. That would make the total auctioned for the week a record-tying $118 billion.

Coard said the results of the auction Wednesday raises concerns for Thursday's offering. But he noted that the higher yield of the seven-year note could draw more investors than the lower-paying two and five-year notes have.

The drop in prices and the rise in yields came even as demand for safety increased.

The dollar jumped to its highest level against the euro in 10 months after Fitch Ratings cut Portugal's credit rating. Fitch predicts that a slower economic rebound in the country will make it harder to make good on debt payments. Investors have been watching problems with soaring debt in Europe. Greece has also been struggling to cut its deficit but has managed to avoid a downgrade to its credit rating.

The concern is that debt problems with struggling countries in Europe could have a ripple effect on other markets for sovereign debt, which could threaten the ability of governments to fund economic stimulus measures as many countries remain mired in recession.

In other trading, the yield on the two-year note that matures in March 2012 rose to 1.10 percent from 0.99 percent Tuesday. Its price dropped 4/32 to 99 25/32.

The yield on 30-year bond that matures in February 2040 rose to 4.74 percent from 4.61 percent. Its price fell 1 29/32 to 98 7/32.

The yield on the three-month T-bill that matures June 24 rose to 0.13 percent from 0.12 percent. Its discount rate was 0.14 percent.

http://moneynews.com/FinanceNews/US-Cre ... /id/353786

[winston]

Investors Avoid U.S. Bonds for Third Time This Week

Prices of U.S. government debt fell on Thursday following a weak auction of $32 billion in seven-year Treasury notes.

The high yield on the auction came in at 3.37 percent, above the market's expectations.

"The auction went terribly," said Tom Simons, money market economist at Jefferies & Co. "It appears the foreign bid was on the sidelines again as we approach Japanese year-end (March 31)."

Thursday's auction capped a week of $118 billion in new supply which met with a lukewarm reception in the marketplace.

Benchmark 10-year Treasury notes fell 13/32 in price to yield 3.93 percent, the highest since June 11 and up from 3.86 percent at Wednesday's close. The seven-year note dropped 11/32 to yield 3.35 percent, up from 3.29 percent on Wednesday.

Fresh worries about government bonds issued by Greece and Portugal contributed to investors' wariness of sovereign debt, analysts said.

The price of insuring U.S. debt against default rose. Credit-default swap spreads grew to 40 basis points, while the yield on U.S. 30-year bonds reached a nine-month high.

The huge wave of new government debt supply is affecting the price of Treasuries, while a more-or-less steady stream of positive data on the U.S. economy adds to expectations of higher inflation and interest rate increases.

This was particularly evident in the interest rate swaps market where U.S. debt is trading at a discount to private-sector credit.

"Most of the damage was done yesterday," said George Goncalves, an interest-rate strategist at Nomura Securities in New York, referring to Wednesday's steep sell-off following a weak auction of $42 billion in five-year Treasury notes.

The 30-year Treasury bond fell 20/32 in price to yield 4.78 percent, up from 4.74 percent on Wednesday.

http://moneynews.com/FinanceNews/Invest ... /id/353880

[winston]

US Bonds

Bonds did recover some on the session with the 10 year closing down (3.85% versus 3.88% Thursday). There was a big move during the week as bonds rallied, with the 10 year moving up from the 3.869% level close to 3.9%.

There was a big move on Wednesday, and you can tie this into many things. The healthcare bill was passed. There will have to be more money printed. There was a bad 7 year auction on Thursday that had to offer a higher yield in order for investors to take the paper.

That is symptomatic of the problems with a huge debt and deficit that is only going to get larger. Bonds are selling and interest rates are rising because of the amount of money required to be printed. That is inflationary, so interest rates will rise.

Also, there is improvement in the US, and rates tend to rise when there is improvement in the economy. The Fed will also have to raise interest rates at some point. There is a triumvirate of issues pushing yields higher and driving bonds lower as a result. I do not expect that to change any time soon unless there is a major problem overseas to impact the price of oil and bonds, making US bonds look more attractive as a safe haven.

Right now, it does not look like anything along those lines will appear, especially given that the EU now has a plan. With that, everything is coming up roses, no doubt.


Source: MarketFN.com

[winston]

US Bonds

Bonds sold back again on Friday. The 10 year closed up (3.86% yield versus 3.83%). One would anticipate bonds to sell as the economy improves, and that is what happened with the gap down. It is holding at the 200 day EMA, but that keeps the bond market below key support levels. That is what I am really watching here. It broke out of this range, and it may not be able to recover again. Bonds may be done for now, and we will see higher and higher yield and lower and lower prices.

You would expect higher yields because the economy is improving and because we are still printing a lot of money. There will be inflation. European inflation rose 1.5% in March that is a significant jump. We are printing as much money as they are, so we will likely follow them in the near future. Overall, the other markets are acting as you would expect in conjunction with the stock market on improving economic data.

While there is not radical or dynamic improvement, it is a solid enough improvement coming off of that terrible low; there will be improvement across the board in all the markets. I said there would be a recovery, it is just the strength of the recovery and how dynamic it is. This one is not that strong, but it is still a recovery still.

Coming out of the 1982 recession, at this point there were already over 1M jobs created. Now we are still losing jobs, but that is likely to change on Friday. We will probably create jobs, but will it have any longevity? There are 100K jobs for the census, 100K attributable to catching up for lost jobs during the bad weather, and maybe a few more thrown on top of that for general economic recovery. Will it show up again later in the summer after all the census workers are laid off? It remains to be seen, but we are in a nice, slow recovery.


Source: MarketFN.com