By Sapna Maheshwari - Aug 31, 2010 4:19 PM GMT+0800
Companies are planning to sell at least $4.25 billion of debt as signs show the U.S. economic recovery may falter.
Bond sales totaled $6.7 billion in the five days ended Aug. 27, a 56 percent drop from the prior week, according to data compiled by Bloomberg. No junk-rated companies have sold debt in the U.S. since Aug. 20, Bloomberg data show.
“A lot of people started the year off thinking we’d see some positive signs of economic data and we’d really be able to get this recovery going,” said Rajeev Sharma, a money manager at First Investors Management Co., who oversees $1.4 billion of investment-grade debt. “It seems to be a lot slower than what most investors thought.”
Federal Reserve Chairman Ben S. Bernanke said Aug. 27 the central bank “will do all that it can” to sustain a recovery. His speech at the annual economic symposium in Jackson Hole, Wyoming, came after a week of steadily negative news including weaker-than-expected home sales and a revision showing the economy grew by 1.6 percent in second quarter rather than the 2.4 percent initially reported by the Commerce Department.
A report yesterday showed personal income also climbed less than expected in July.
The extra yield investors demand to own investment-grade corporate bonds instead of Treasuries rose 1 basis point to 192 basis points, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Yields fell 8 basis points to 3.798 percent. The index touched a record 3.74 percent on Aug. 24, the lowest in the history of the measure dating to October 1986. A basis point is 0.01 percentage point.
Sara Lee Corp., the maker of Ball Park hot dogs and Hillshire Farm meat products, sold $800 million of debt in a two-part offering yesterday, and Dominion Resources Inc., the owner of Virginia’s largest utility, sold $250 million of notes. They were the only two bond offerings for the day, Bloomberg data show.
Utilities have issued at least $4.17 billion of debt this month, the most since selling $5.2 billion in March, Bloomberg data show.
September will likely have “a huge calendar” of bond sales, Sharma said in a telephone interview. Last September, companies issued $125 billion of bonds, Bloomberg data show.
“September, typically speaking, is a big month,” Sharma said. “I would not be surprised to see about $5 billion in issuance per day.”
Companies sold $97.3 billion of bonds this month, a 37 percent increase from the similar period last year and the busiest August since 2007, Bloomberg data show. July corporate bond sales were $90.3 billion.
Spreads on high-yield, high-risk debt widened 8 basis points to 689 basis points, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. Yields on the securities fell 2 basis points to 8.565 percent.
Junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
The following is a description of at least $4.25 billion of pending sales of dollar-denominated bonds in the U.S.
Investment Grade
AON CORP., the world’s largest insurance brokerage, plans to sell as much as $1.5 billion of senior notes to help finance its acquisition of Hewitt Associates Inc., the Chicago-based company said in an Aug. 16 regulatory filing. Aon may also use proceeds to refinance Hewitt’s existing debt and to pay related expenses, it said in the filing.
DOHA BANK QSC, Qatar’s third-largest bank, may raise as much as $1 billion from bond sales, its chief executive officer said. The money is likely to be raised for five years and is meant to “fix the maturity mismatch” on the bank’s balance sheet, Raghavan Seetharaman said in a June 16 telephone interview from Doha. The bank will sell the bonds in dollars and the local riyal currency, the CEO said in a July 25 interview.
Not Rated
*****KOREA DEVELOPMENT BANK, the state-run lender known as KDB, plans to sell 5-year dollar-denominated global notes as soon as this week, according to a person familiar with the transaction, who declined to be identified because terms aren’t set. The Seoul-based lender is considering selling as much as $1 billion of dollar-denominated bonds to repay maturing debt, according to another three people familiar with the matter. The Seoul-based lender may sell at least $500 million of notes, said the people, who asked not to be identified as a final decision hasn’t been made.
STERICYCLE INC. plans to issue $175 million of seven-year, 3.89 percent notes and $225 million of 10-year, 4.47 percent debt after receiving informal commitments from 22 institutional investors to buy the securities, it said in a statement distributed by Business Wire.
High Yield
NBTY INC., the maker of Nature’s Bounty and MET-Rx nutritional supplements, may issue $900 million of bonds in addition to seeking a $1.5 billion term loan and a $200 million revolving line of credit to help pay for its acquisition by Carlyle Group, according to a person familiar with the transaction who declined to be identified because terms aren’t set. S&P assigned the notes, or borrowings under a bridge credit facility in their place, a rank of B.
UNIVERSAL HEALTH SERVICES INC., the operator of more than 100 U.S. medical facilities that’s buying Psychiatric Solutions Inc., cut its offering of senior unsecured notes to $250 million, according to a person familiar with the transaction. It increased the size of the term loans it’s seeking by $100 million, said the person, who declined to be identified because terms aren’t set. The King of Prussia, Pennsylvania-based company previously planned to issue $400 million of senior unsecured debt to help finance the acquisition, according to a filing with the Securities and Exchange Commission.
E-LAND FASHION CHINA HOLDINGS LTD, the Hong Kong-based apparel products provider, hired Morgan Stanley to help it sell $200 million of three-year bonds, according to a person familiar with the matter. The company plans to begin meeting with investors in Asia, Europe and the U.S. on July 19, said the person, who declined to be identified because terms aren’t set. Moody’s Investors Service ranked the proposed notes at Ba2, citing growing personal consumption in China, E-Land Fashion’s moderate scale and significant business volatility. Proceeds will be used for mainly for capital expenditures and general corporate purposes, Moody’s said in the report.
Offerings in Pipeline
***** RENHE COMMERCIAL HOLDINGS CO. may sell dollar bonds after it hired Bank of America Corp., BOC International Holdings Ltd. and UBS AG to arrange talks with bond investors in Asia, Europe and the U.S. starting Aug. 30, said a person familiar with the matter. The developer of shopping centers in China is rated Ba2 at Moody’s and BB at S&P.
FORETHOUGHT FINANCIAL GROUP INC. plans to sell $150 million of 10-year bonds, according to a person familiar with the transaction, who declined to be identified because terms aren’t set. S&P assigned the notes a grade of BBB- in a March 24 report.
AEGIS LTD., an outsourcing unit of Essar Group, may sell the first non-convertible dollar bonds from an Indian information technology company. The company, which bought PeopleSupport Inc. in 2008, may sell its bonds as part of a financing package that would include a loan of as much as $350 million to consolidate debt, Chief Financial Officer C.M. Sharma said. The money would go to fund expansion
AMERICAN INTERNATIONAL GROUP INC., the insurer that’s majority owned by the U.S., may sell bonds to help repay its government bailout, it said in an Aug. 9 registration statement filed with the Securities and Exchange Commission.
GATX CORP., a Chicago-based company that leases railroad cars and other equipment, filed a shelf registration with the Securities and Exchange Commission to sell debt securities and pass-through certificates. The debt securities may be senior or subordinated, according to the filing.
JSW STEEL LTD, India’s third-largest steelmaker, plans to sell dollar bonds for the first time in three years and as rupee-denominated finance costs rise. JSW has applied for credit ratings before a possible offshore bond sale to help build a 200 billion rupee ($4.3 billion) steel and power plant in West Bengal, Chief Financial Officer Seshagiri Rao said.
ARGENTINA may sell $1 billion of bonds due in 2017, El Cronista newspaper reported, without saying how it obtained the information. The government is also planning to offer an exchange for dollar bonds due in 2011 and 2012, the Buenos Aires-based publication said.
RURAL ELECTRIFICATION CORP., India’s state-owned lender to power projects, may sell as much as $300 million of bonds in U.S. dollars, Finance Director Hari Das Khunteta said in a telephone interview. Rural Electrification plans to raise $500 million from debt sales in the period, he had said on April 16.
THE PHILIPPINES hired eight banks to help arrange the sale of 10-year bonds, which may also include five- and seven-year issues, Treasurer Roberto Tan wrote in a mobile-phone message. The Philippines is also preparing to seek central bank approval for a planned sale of new dollar-denominated debt to exchange for older, shorter-dated notes, Finance Secretary Cesar Purisima said on August 2.
UKRAINE may sell bonds in the international capital markets, according to Dragon Capital, the former Soviet republic’s biggest brokerage. The government may sell $1.5 billion to $2 billion of 10-year, dollar-denominated debt with a yield of 7 percent to 7.5 percent after getting approval for a new International Monetary Fund loan and having its credit rating raised by Standard & Poor’s, said Olena Bilan, Dragon’s chief economist, at a press briefing in Kiev on July 30.
CZECH REPUBLIC plans to sell as much as $2 billion of dollar bonds to diversify from koruna and euro debt, Eduard Janota, former finance minister, said in an interview for Mlada Fronta Dnes newspaper.
POTASH CORPORATION OF SASKATCHEWAN INC., the world’s largest fertilizer company by capacity, filed a registration statement with the U.S. Securities and Exchange Commission for $2 billion of debt securities.
INDONESIA plans to name three banks to help it sell approximately $650 million of Islamic bonds in October, Dahlan Siamat, director for Islamic financing at the finance ministry, said in a telephone interview in Jakarta. The government sold its first international Islamic dollar bonds in April 2009.
CORPORACION FINANCIERA DE DESAROLLO SA, Peru’s state development bank known as Cofide, plans to sell as much as $250 million of bonds, according to Chief Financial Officer Carlos Linares. Linares said in an interview in Lima, that the lender is selling long-term debt as it boosts lending to local infrastructure projects. “Peru’s need for infrastructure is huge,” Linares said. “The government is trying to promote foreign investment in a long list of projects.”
SRI LANKA hired HSBC, Bank of America Merrill Lynch and Royal Bank of Scotland to sell $1 billion of bonds, the Central Bank of Sri Lanka said on its website on Aug 12.
JORDAN plans to sell about $500 million of bonds, Finance Minister Mohammad Abu Hammour said in an interview on June 23. The sale will be denominated in U.S. dollars “as it’s a stable currency and the Jordanian dinar is pegged to it,” Abu Hammour said.
URUGUAY may sell as much as $1 billion of bonds in 2011, including $500 million of dollar-denominated debt, Carlos Steneri, director of public credit at Uruguay’s Ministry of Economy and Finance, said June 3 at a Latin Finance conference in London. The dollar-denominated bonds may have a maturity of 20 years or more, Steneri said.
MALAYSIA plans to raise about $1 billion from its first sale of conventional dollar bonds in eight years after drawing bids for five times the Islamic debt it offered, a finance ministry official said. The government may hire the same banks, including CIMB Group Holdings Bhd. and HSBC Holdings Plc, to arrange the sale by Sept. 30, said the official, who declined to be named as the discussions are private. Malaysia raised $1.25 billion from a Shariah-compliant dollar bond on May 27. Malaysia is rated A3 by Moody’s and A- by S&P.
GHANA is considering selling its second dollar bond in 2011 to tap investor demand as the start-up of oil production boosts economic growth and narrows the budget deficit, Deputy Finance Minister Fifi Kwetey said. The government was considering a “no-deal roadshow” to gauge international investors’ appetite, Kwetey said in a May 26 interview in Abidjan. Ghana sold its first global bond in 2007, raising $750 million to help fund the construction of roads and power plants.
ANGOLA received credit ratings from Moody’s, S&P, and Fitch Ratings that put it on par with Nigeria, Lebanon and Belarus, and paved the way for a planned sale of international bonds. The southern African nation’s creditworthiness was rated at B+ by S&P and Fitch, four levels below investment grade. Moody’s assigned an equivalent ranking of B1.
BANK FOR INVESTMENT & DEVELOPMENT OF VIETNAM received approval from the central bank to issue 7 trillion dong ($369 million) of notes and another 3 trillion dong of dollar- denominated notes in 2010, according to a statement on State Bank of Vietnam’s Web site.
BOLIVIA plans its first international bond sale in more than 70 years as early as the end of 2011, Finance Minister Luis Arce said. He didn’t disclose the size of the offering.
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORP. of the Philippines may sell between $750 million and $1.5 billion of dollar-denominated bonds “anytime” to help refinance maturing debt, Vice Chairman Jose Ibazeta said. The company manages the finances of state utility National Power Corp.
BRISBANE AIRPORT CORP., owner of Australia’s third-busiest airport, may sell bonds in the U.S. as it pursues new markets to help refinance debt and pay for a new runway. The company is considering a 10- or 15-year U.S. private placement and a five- to seven-year Australian dollar bond sale in late 2010 or early 2011, Chief Financial Officer Tim Rothwell said in a phone interview from Brisbane.
VIETNAM NATIONAL COAL-MINERAL INDUSTRIES GROUP, the state- owned coal producer known as Vinacomin, plans to sell as much as $500 million of bonds overseas to fund mining and energy projects, according to Deputy Chief Executive Officer Nguyen Van Hai.
FINLAND may sell five-year bonds denominated in dollars, the Finnish Treasury said in a document posted on its Web site.
MONGOLIA plans to raise $500 million selling bonds in 2010 and the remainder of a planned $1.2 billion program will be sold according to market conditions, Batbayar Balgan, director general of the financial and economic policy department of Mongolia, said at a forum in Ulan Bator on June 16. The government scaled back its plans for global bond sales after Europe’s debt crisis drove up borrowing costs. Investment banks are advising Mongolia to issue debt with maturities of 5 years to 10 years, Bayartsogt said in a Feb. 9 interview. The securities may yield 8 percent to 11 percent, he said.
To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net.
From Bloomberg published on Aug 31, 2010 4:19 PM GMT+0800
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Bond Tips for Yield Chasers
AUGUST 28, 2010
By BEN LEVISOHN
In the surging bond market of 2010, what began as a quest for safety is quickly morphing into a grab for yield. If investors aren't careful, they could end up with neither.
With short-term Treasury rates plummeting—the two-year note's yield touched a record low of 0.454% on Aug. 17—investors have been looking for other ways to juice their returns.
Not only are they gobbling up long-term government bonds, they also are feasting on the debt of low-rated companies. During the past three months, 30-year Treasurys have jumped by 8.5%, while so-called junk bonds have risen by 6.5%. Their yields, which move in the opposite direction of price, have fallen accordingly.
Eager to feed investors' appetites, companies issued a record $15.4 billion in junk bonds the week ended Aug. 13, the most since at least 1997. Norfolk Southern Corp., an investment-grade railroad, even sold $250 million in 100-year bonds on Aug. 23, and there is talk of more century deals to come.
Major Risks
But both long-term Treasurys and junk bonds have major risks. While 30-year Treasurys boast low "credit risk," or the likelihood that the investor won't get paid back, they carry high "duration risk," because their long maturity means there is more of a chance for inflation to erode returns. Junk bonds, meanwhile, have shorter terms and therefore are much less sensitive to fluctuating interest rates—but they carry high credit risk.
Either play, on its own, can be dangerous. When 10-year Treasury yields rose 2.5 percentage points from 1993 to 1994, the value of long-term Treasurys dropped by more than 5%. Junk bonds, meanwhile, lost 7% from their 1999 peak to their 2000 trough. When the financial system imploded in 2008, junk bonds fell by a staggering 35%.
It is important not to confuse the current hunt for yield with the excesses of the mid-aughts. By 2007, the difference between a junk bond and a U.S. Treasury had fallen to 2.75 percentage points, the lowest since at least 1987; it now is about 6 points, near its historical average.
Even after the recent drop in 30-year Treasury yields, from 4.63% at the beginning of the year to about 3.68% now, the difference between the long bond and overnight rates is still 1.6 percentage points above its historical average, according to Gluskin-Sheff chief economist David Rosenberg.
Still, those spreads have narrowed considerably. By chasing the best-performing bond sectors, investors risk overloading their portfolios and leaving themselves exposed should economic growth prove stronger or weaker than expected.
Guggenheim Partners, which manages money for institutions and high-net-worth investors, has been betting on both long-term Treasurys and junk bonds—but in different ways.
It has put about half of its portfolio in long-term Treasurys and other government debt. (It prefers 15-year zero-coupon bonds, which have a similar duration to 30-year Treasurys.) It is putting the other half in the short-term debt of junk-rated companies that have cash or access to it. Even if the economy continues to deteriorate, most of these companies should have the wherewithal to pay back the principal when the bond matures, says Guggenheim Chief Investment Officer Scott Minerd.
Mr. Minerd says the strategy yields about 5.5% now—more than twice a 10-year Treasury bond, with similar duration risk.
"If rates continue to fall, I get a lot of price appreciation out of the zeros," Mr. Minerd says. "But if rates go higher, 50% of my portfolio turns into cash in a year and I get the opportunity to reinvest at higher rates."
One of Guggenheim's junk holdings is an Eastman Kodak Co. bond maturing in November 2013, which yields about 9%. The fallen blue chip had $1.3 billion on its balance sheet as of June, more than twice as much as the debt coming due.
Seeking Diversification
Still, the strategy carries enough duration and credit risk for safety-minded investors to be wary. For those who seek even more diversification, J.P. Morgan Private Bank has set up a portfolio of assets that tend not to move in the same direction, which it has dubbed the Dynamic Yield Strategy.
The portfolio currently consists of 12% short-term government bonds, 17.5% high-yield bonds, 6% emerging-market debt, 10% floating-rate bank loans, 5% convertible bonds, 7.5% "call" and "put" options, 20% global macro hedge funds, 10% dividend-paying stocks, 10% "credit-spread strategies" and 2% in cash.
The result is a portfolio that yields about 3.4%, nearly one percentage point more than a 10-year Treasury, with one-quarter the exposure to a rise in interest rates, says J.P. Morgan.
"There's no doubt there's a huge search for yield," says Jamie Kramer, head of thematic advisory at the bank. "But it's better to be smart about the risks you're taking."
From The Wall Street Journal published on Thursday, August 28, 2010
By BEN LEVISOHN
In the surging bond market of 2010, what began as a quest for safety is quickly morphing into a grab for yield. If investors aren't careful, they could end up with neither.
With short-term Treasury rates plummeting—the two-year note's yield touched a record low of 0.454% on Aug. 17—investors have been looking for other ways to juice their returns.
Not only are they gobbling up long-term government bonds, they also are feasting on the debt of low-rated companies. During the past three months, 30-year Treasurys have jumped by 8.5%, while so-called junk bonds have risen by 6.5%. Their yields, which move in the opposite direction of price, have fallen accordingly.
Eager to feed investors' appetites, companies issued a record $15.4 billion in junk bonds the week ended Aug. 13, the most since at least 1997. Norfolk Southern Corp., an investment-grade railroad, even sold $250 million in 100-year bonds on Aug. 23, and there is talk of more century deals to come.
Major Risks
But both long-term Treasurys and junk bonds have major risks. While 30-year Treasurys boast low "credit risk," or the likelihood that the investor won't get paid back, they carry high "duration risk," because their long maturity means there is more of a chance for inflation to erode returns. Junk bonds, meanwhile, have shorter terms and therefore are much less sensitive to fluctuating interest rates—but they carry high credit risk.
Either play, on its own, can be dangerous. When 10-year Treasury yields rose 2.5 percentage points from 1993 to 1994, the value of long-term Treasurys dropped by more than 5%. Junk bonds, meanwhile, lost 7% from their 1999 peak to their 2000 trough. When the financial system imploded in 2008, junk bonds fell by a staggering 35%.
It is important not to confuse the current hunt for yield with the excesses of the mid-aughts. By 2007, the difference between a junk bond and a U.S. Treasury had fallen to 2.75 percentage points, the lowest since at least 1987; it now is about 6 points, near its historical average.
Even after the recent drop in 30-year Treasury yields, from 4.63% at the beginning of the year to about 3.68% now, the difference between the long bond and overnight rates is still 1.6 percentage points above its historical average, according to Gluskin-Sheff chief economist David Rosenberg.
Still, those spreads have narrowed considerably. By chasing the best-performing bond sectors, investors risk overloading their portfolios and leaving themselves exposed should economic growth prove stronger or weaker than expected.
Guggenheim Partners, which manages money for institutions and high-net-worth investors, has been betting on both long-term Treasurys and junk bonds—but in different ways.
It has put about half of its portfolio in long-term Treasurys and other government debt. (It prefers 15-year zero-coupon bonds, which have a similar duration to 30-year Treasurys.) It is putting the other half in the short-term debt of junk-rated companies that have cash or access to it. Even if the economy continues to deteriorate, most of these companies should have the wherewithal to pay back the principal when the bond matures, says Guggenheim Chief Investment Officer Scott Minerd.
Mr. Minerd says the strategy yields about 5.5% now—more than twice a 10-year Treasury bond, with similar duration risk.
"If rates continue to fall, I get a lot of price appreciation out of the zeros," Mr. Minerd says. "But if rates go higher, 50% of my portfolio turns into cash in a year and I get the opportunity to reinvest at higher rates."
One of Guggenheim's junk holdings is an Eastman Kodak Co. bond maturing in November 2013, which yields about 9%. The fallen blue chip had $1.3 billion on its balance sheet as of June, more than twice as much as the debt coming due.
Seeking Diversification
Still, the strategy carries enough duration and credit risk for safety-minded investors to be wary. For those who seek even more diversification, J.P. Morgan Private Bank has set up a portfolio of assets that tend not to move in the same direction, which it has dubbed the Dynamic Yield Strategy.
The portfolio currently consists of 12% short-term government bonds, 17.5% high-yield bonds, 6% emerging-market debt, 10% floating-rate bank loans, 5% convertible bonds, 7.5% "call" and "put" options, 20% global macro hedge funds, 10% dividend-paying stocks, 10% "credit-spread strategies" and 2% in cash.
The result is a portfolio that yields about 3.4%, nearly one percentage point more than a 10-year Treasury, with one-quarter the exposure to a rise in interest rates, says J.P. Morgan.
"There's no doubt there's a huge search for yield," says Jamie Kramer, head of thematic advisory at the bank. "But it's better to be smart about the risks you're taking."
From The Wall Street Journal published on Thursday, August 28, 2010
Bond funds: Why they're risky -- and why they're safe
Bond funds have been a popular investor choice in recent weeks, but some investment gurus warn of a bond-fund bubble that will burst. Here's the case for and against bond funds.
By Mark Trumbull, Staff writer / August 24, 2010
Investors poured money into bonds Tuesday, as worries about the economy battered the stock market.
The rush into bond funds amplifies a trend that's been largely in place since the financial crisis began, but it raises an important question: At this point, are people playing it safe or risky when they emphasize bonds over stocks in their retirement funds?
Some investment gurus warn of a bond-fund bubble that will burst – hitting US Treasury bonds hardest of all – perhaps within the next year. A rival camp sees the big risks in stocks in the near term. Given the uncertainty, a middle-ground view emphasizes the virtues of a balanced mix of bonds and stocks.
Mutual-fund investors continue to vote with their feet for bonds. In each of the five weeks ending Aug. 11, they poured more than $6 billion into bond funds. And in each of those weeks, investors were pulling money out of stock mutual funds at a rate of $1 billion to $4 billion per week, according to the Investment Company Institute in Washington.
On Tuesday, falling home sales and other signs of economic weakness sent stock prices falling and prompted an investor rush toward bonds. The yield on the 10-year Treasury note fell to just 2.5 percent, the lowest since early 2009. (The yield on a bond falls as its price rises. In effect, rising demand means that investors are willing to settle for a smaller stream of income.)
Here's the case for and against bond funds:
Why bond funds are risky
Although bonds are less volatile in price than stocks, they can fluctuate considerably at turning points in the economy. If the economy turns up, even just enough to clearly avoid a "double dip" recession, bond prices could suffer as investors begin to gravitate back toward the stock market.
It's hard to predict when a shift will occur, but at some point, many investment strategists warn, Treasury bonds will become the worst-performing bonds of all. That's precisely because these bonds are considered to be among the safest investor havens during hard times. If a crisis mind-set eases, Treasuries have run up so far in price that they have the furthest to fall.
"The US is in the midst of a sharp but temporary slowdown that will give way to stronger growth later this year and into 2011," Michael Darda, chief economist at the investment firm MKM Partners, wrote in a note to clients Monday. That makes him bullish on stocks.
A revival of inflationary pressure would pose another worry for bonds. Interest rates might rise as investors demand a higher return to compensate them for inflation. The prices of existing bonds would adjust downward accordingly.
One example of how vulnerable bond funds can be when the mood toward bonds shifts: The Fidelity Government Income Fund, which invests mostly in US government bonds (ticker symbol FGOVX), saw its share price fall 13 percent during a six-month period starting late in 1993. The sell-off in bonds came just before a period of massive gains for stock investors.
Since the onset of the financial crisis in 2007, a Barclays exchange-traded fund that tracks long-term US Treasury bonds has gained more than 20 percent in value. This bond fund (ticker symbol TLH) has risen so sharply since March that it's currently near the peak it reached at the end of 2008.
Why bond funds are safe
The bullish view is that bond funds have risen for a good reason: The outlook for the economy has grown worse than investors had foreseen a few months ago. Although US stocks have lost more than 10 percent of their value since April, they could easily fall a lot further if the economy keeps getting worse.
Treasury bonds, the same ones that critics say are in a bubble, tend to perform the best during a crisis. Put another way, even though stock and bond prices can often move in the same direction, Treasuries tend to be more protected from a stock bear market than, say, corporate bonds are.
The bond-bull camp doesn't foresee a big sell-off in bonds until the economy mounts a strong recovery. And in its view, that could take more than a year. In the meantime, bond investors will earn at least a modest income – more than they could get in money-market mutual funds that are often yielding nearly zero percent interest.
In this view, inflation won't get going anytime soon. That's because the economy's troubles stem from over-indebted consumers, troubled banks, and a government that may be running out of stimulus options. In other words, this hasn't been a garden-variety recession and won't be a typically strong recovery either. (Inflation tends to appear during a robust recovery.)
What about when an economic recovery does kick in?
Bonds won't tank overnight. Even if investors do experience a bear market in bonds, some research offers a brighter view of what occurs: If bond-fund investors stay the course, argues a report issued by Vanguard, a big provider of mutual funds, the losses in portfolio value if bond prices fall would ultimately be offset by rising income from their bond funds.
Of five hypothetical scenarios that Vanguard researchers examined, the one with the biggest shareholder loss in the short term (one year) was also the one with the highest annualized returns over a 10-year period.
Follow the bond bulls, bears, or both?
Both sides in this bond-fund debate have some strong arguments. One option for investors is not to side wholly with either camp.
To many investment strategists, the prudent course for people saving for retirement is to hold a balanced mix of stocks and bonds. It's a classic view, based on the notion that stocks have provided stronger returns than bonds during most periods, while bonds add some stability without dragging long-term performance down too much.
From The Christian Science Monitor published on AUGUST 24, 2010
By Mark Trumbull, Staff writer / August 24, 2010
Investors poured money into bonds Tuesday, as worries about the economy battered the stock market.
The rush into bond funds amplifies a trend that's been largely in place since the financial crisis began, but it raises an important question: At this point, are people playing it safe or risky when they emphasize bonds over stocks in their retirement funds?
Some investment gurus warn of a bond-fund bubble that will burst – hitting US Treasury bonds hardest of all – perhaps within the next year. A rival camp sees the big risks in stocks in the near term. Given the uncertainty, a middle-ground view emphasizes the virtues of a balanced mix of bonds and stocks.
Mutual-fund investors continue to vote with their feet for bonds. In each of the five weeks ending Aug. 11, they poured more than $6 billion into bond funds. And in each of those weeks, investors were pulling money out of stock mutual funds at a rate of $1 billion to $4 billion per week, according to the Investment Company Institute in Washington.
On Tuesday, falling home sales and other signs of economic weakness sent stock prices falling and prompted an investor rush toward bonds. The yield on the 10-year Treasury note fell to just 2.5 percent, the lowest since early 2009. (The yield on a bond falls as its price rises. In effect, rising demand means that investors are willing to settle for a smaller stream of income.)
Here's the case for and against bond funds:
Why bond funds are risky
Although bonds are less volatile in price than stocks, they can fluctuate considerably at turning points in the economy. If the economy turns up, even just enough to clearly avoid a "double dip" recession, bond prices could suffer as investors begin to gravitate back toward the stock market.
It's hard to predict when a shift will occur, but at some point, many investment strategists warn, Treasury bonds will become the worst-performing bonds of all. That's precisely because these bonds are considered to be among the safest investor havens during hard times. If a crisis mind-set eases, Treasuries have run up so far in price that they have the furthest to fall.
"The US is in the midst of a sharp but temporary slowdown that will give way to stronger growth later this year and into 2011," Michael Darda, chief economist at the investment firm MKM Partners, wrote in a note to clients Monday. That makes him bullish on stocks.
A revival of inflationary pressure would pose another worry for bonds. Interest rates might rise as investors demand a higher return to compensate them for inflation. The prices of existing bonds would adjust downward accordingly.
One example of how vulnerable bond funds can be when the mood toward bonds shifts: The Fidelity Government Income Fund, which invests mostly in US government bonds (ticker symbol FGOVX), saw its share price fall 13 percent during a six-month period starting late in 1993. The sell-off in bonds came just before a period of massive gains for stock investors.
Since the onset of the financial crisis in 2007, a Barclays exchange-traded fund that tracks long-term US Treasury bonds has gained more than 20 percent in value. This bond fund (ticker symbol TLH) has risen so sharply since March that it's currently near the peak it reached at the end of 2008.
Why bond funds are safe
The bullish view is that bond funds have risen for a good reason: The outlook for the economy has grown worse than investors had foreseen a few months ago. Although US stocks have lost more than 10 percent of their value since April, they could easily fall a lot further if the economy keeps getting worse.
Treasury bonds, the same ones that critics say are in a bubble, tend to perform the best during a crisis. Put another way, even though stock and bond prices can often move in the same direction, Treasuries tend to be more protected from a stock bear market than, say, corporate bonds are.
The bond-bull camp doesn't foresee a big sell-off in bonds until the economy mounts a strong recovery. And in its view, that could take more than a year. In the meantime, bond investors will earn at least a modest income – more than they could get in money-market mutual funds that are often yielding nearly zero percent interest.
In this view, inflation won't get going anytime soon. That's because the economy's troubles stem from over-indebted consumers, troubled banks, and a government that may be running out of stimulus options. In other words, this hasn't been a garden-variety recession and won't be a typically strong recovery either. (Inflation tends to appear during a robust recovery.)
What about when an economic recovery does kick in?
Bonds won't tank overnight. Even if investors do experience a bear market in bonds, some research offers a brighter view of what occurs: If bond-fund investors stay the course, argues a report issued by Vanguard, a big provider of mutual funds, the losses in portfolio value if bond prices fall would ultimately be offset by rising income from their bond funds.
Of five hypothetical scenarios that Vanguard researchers examined, the one with the biggest shareholder loss in the short term (one year) was also the one with the highest annualized returns over a 10-year period.
Follow the bond bulls, bears, or both?
Both sides in this bond-fund debate have some strong arguments. One option for investors is not to side wholly with either camp.
To many investment strategists, the prudent course for people saving for retirement is to hold a balanced mix of stocks and bonds. It's a classic view, based on the notion that stocks have provided stronger returns than bonds during most periods, while bonds add some stability without dragging long-term performance down too much.
From The Christian Science Monitor published on AUGUST 24, 2010
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