Europe bond yields to keep stocks spellbound

By Rodrigo Campos
NEW YORK | Sun Nov 27, 2011 3:48pm EST

(Reuters) - U.S. investors came to the Thanksgiving holiday table on Thursday mostly thankful that the week was a short one, or losses could have been larger.

As another round of news and bond auctions from Europe begins next week, traders will watch closely sovereign bond yields that have kept markets on edge.

Yields rose in almost every euro-zone country this week, and Germany failed to find enough bids for a 10-year auction. The S&P 500 reacted by posting a second straight week of declines and its worst week in two months.

Politicians are scrambling to find a way out of a two-year-old sovereign debt crisis in the euro zone and a visit to Washington from top European Union officials, as well as a meeting of euro-zone finance ministers, will provide the market with headlines and possibly add to uncertainty.

With the specter of rising yields, France, Britain, Italy, Belgium and Spain are holding debt sales next week. The direction of bond yields will determine the direction of equity markets.

"Politicians are trying to buy themselves time so austerity measures kick in and impact budgets and deficits and markets become more forgiving and rates come down," said Wasif Latif, vice president of equity investments at the San Antonio, Texas-based USAA Investment Management, which manages about $45 billion.

"The credit market and fixed income are a little bit more in the eye of storm; that's where the issue is rising, so equities are more reactionary," he said. "You may continue to see more of the same."

Investors have worried about rising borrowing costs in many euro-zone nations, but Italy, the third-largest euro zone economy, has grabbed most of the focus. On Friday Rome paid a record 6.5 percent to borrow for six months and almost 8 percent to issue two-year zero coupon bonds.

Many market participants have said that the sharply differentiated risk-on and -off trades that the euro zone crisis has generated has seen equities being sold as an asset class, with little or no difference between strong and week balance sheets and earnings reports. But a wedge has opened at least from a global perspective, as data show stocks of companies with more exposure to Europe are underperforming.

POLITICS TO DRIVE THE WEEK

President Barack Obama will meet on Monday with European Council President Herman van Rompuy and European Commission President Jose Manuel Barroso, and Europe's response to the two-year sovereign debt crisis is expected to top the agenda.

"The only thing that will come out of that is speculation," said Todd Salamone, vice president of research at Schaeffer's Investment Research in Cincinnati, referring to the meeting in Washington.

"It will come down to the U.S. trying to convince European leaders to get something in place to solve this crisis."

Not many hopes are set either on Tuesday's meeting where euro-zone finance ministers are expected to agree on how to further strengthen the region's bailout fund.

On Thursday, European Central Bank President Mario Draghi presents the bank's annual report to the European parliament.

As the latest reminder from markets to politicians that they are running out of time, Belgium's credit rating was downgraded by Standard & Poor's.

IF EUROPE ALLOWS, DATA WILL BE KEY

Some of the most important U.S. economic monthly data will be released next week, but will it be enough to unlink the stock market's behavior and European yields.

New home sales and the S&P/Case-Shiller home prices index will start the week showing if the housing market continues on life support. Data on confidence among consumers, who flooded U.S. stores on Friday as the holiday shopping season started, will be released on Tuesday.

The Institute for Supply Management's manufacturing report is due, with investors not only looking at the U.S. number on Wednesday but also factory readings from Europe and China on Thursday.

By midweek labor data takes over with the private sector employment report from ADP and Challenger's job cuts report, followed Thursday by the weekly jobless claims numbers and topped by Friday's monthly non-farm payrolls report.

"It would be a little bit refreshing to focus on the U.S. data for a change," said Brian Lazorishak, senior quantitative analyst and portfolio manager at Chase Investment Counsel in Charlottesville, Virginia.

He said if European headlines allow it, the focus will be in the labor market where "most people are looking for modest improvement."

(Reporting by Rodrigo Campos; additional reporting by Edward Krudy; Editing by Kenneth Barry)

Article from Reuters

Merkel Rejects Euro Bonds Again After Auction

By Tony Czuczka and Brian Parkin - Nov 24, 2011 11:12 PM GMT+0800
Article from Bloomberg

German Chancellor Angela Merkel again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.

Euro bonds are “not needed and not appropriate,” Merkel said today at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France. She said euro bonds would “level the difference” in euro-region interest rates. “It would be a completely wrong signal to ignore those diverging interest rates because they’re an indicator of where work still needs to be done.”

Merkel, the leader of Europe’s biggest economy, has so far backed a focus on debt reduction and closer economic coordination, calling for a revision of European Union treaties, a move that threatens to bog down in a multiyear negotiation, as core euro economies risk succumbing to the contagion that began in Greece in 2009.

German analysts, newspaper editorials and opposition politicians stepped up calls for Merkel to shift from an incremental approach after the government sold a fraction of the bonds it auctioned yesterday.

“As the crisis deepens with yesterday’s bond auction, the veil has been torn off Merkel’s policy of muddling through,” Sebastian Dullien, a senior fellow at the European Council on Foreign Relations in Berlin, said in a telephone interview. “It’s only got us closer to the end-game, either the breakup of the euro or euro bonds. The strategy has failed.”

Losing ‘Sex-Appeal’

“The flop shows that bunds are losing their sex-appeal as an extremely secure investment,” Germany’s Handelsblatt business newspaper said in a commentary today. “This shows the crisis has reached the entire euro-zone core. France, Finland, the Netherlands and Austria have to pay more interest for their bonds than just a few months ago.”

German bunds fell a second day. The 10-year bund yield rose as much as 12 basis points, or 0.12 percentage point, to 2.26 percent, the highest since Oct. 28, and was at 2.19 percent at 12:55 p.m. London time. Bids at yesterday’s auction of 10-year securities amounted to 3.889 billion euros ($5.2 billion), out of a maximum target for the sale of 6 billion euros.

Handelsblatt said the shortfall was a “wake-up call” for Merkel’s government, which opposes both issuing bonds for the entire 17-member euro region and allowing the ECB to buy unlimited amounts of euro-nation bonds.

Germany Rejects

The German government stood by its rejection of any common bonds for the euro bloc following a report in Bild newspaper that Merkel’s coalition is concerned it may have to agree to euro bonds under certain conditions. The newspaper didn’t say where it got the information.

“We say ‘no’ to euro bonds,” Economy Minister Philipp Roesler, who is also vice chancellor, said today in parliament in Berlin. “A transfer union would be wrong because it would mean German taxpayers pick up the costs. Euro bonds are wrong because they would mean a rise in interest rates for Germany.”

That contrasted with Handelsblatt’s view. “The ECB remains the only investor that can keep down the interest rates of bonds from euro states in the short-term,” Handelsblatt said. “In the long-term, there’s no getting around the necessity of creating fiscal union with at least partial euro bonds.”

The Frankfurter Allgemeine Zeitung newspaper said that while the low demand for German bunds was “no reason to panic” it shows that “around 2 percent interest for investors in these uncertain times is simply not enough.”

‘Moment of Truth’

“Pressure is growing on Merkel,” said Die Welt newspaper. “Up until now she managed to steer the nation through the crisis so that the people didn’t really notice the turbulence.”

Merkel now faces a “moment of truth” in the crisis as her opposition to ECB bond purchases and euro bonds “is being challenged,” Die Welt said.

German opposition parties ratcheted up calls for euro bonds. Frank-Walter Steinmeier, parliamentary leader of the Social Democratic Party in parliament, said on Nov. 21 that his party wants euro bonds as part of a solution to the crisis.

“A model using euro bonds that links European bonds to a reform program is the better alternative,” Juergen Trittin, a co-leader of the opposition Greens party, said in an N24 television interview today.

In Paris, the French government underlined calls for giving the ECB a bigger role in fighting the crisis.

“What’s not working is confidence and that’s what we must restore,” French Foreign Minister Alain Juppe said today in an interview on France Inter radio. “I hope that reflection will move forward that the ECB should have an essential role to restore confidence.”

To contact the reporter on this story: Tony Czuczka in Strasbourg, France at aczuczka@bloomberg.net Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Article from Bloomberg

Risks, rewards of bond investing

BY MARK JEWELL
Associated Press
Sunday, November 20, 2011
Article from The Post and Courier

BOSTON -- Baby boomers fully embraced the stock market by riding its ups and downs throughout their peak income years.

But now that the oldest boomers are turning 65, their focus has turned toward ensuring a steady income from their investments. And they're likely to find the answer is to put money in bonds rather than stocks, as recent market volatility shows.

Consider that bonds have made stock returns look puny in recent years. Broadly diversified bond mutual funds have provided investors an average annualized return of nearly 5.6 percent over the past five years. That's better than all of the domestic stock fund categories that Morningstar tracks.

With retirement just around the corner for such a sizeable population, it's understandable that investors have deposited a net $670 billion into bond mutual funds since January 2009, while consistently pulling their money out of stock funds. Fidelity Investments says its clients alone have added $100 billion in new cash to bond investments over the past three years.

But do the stock-savvy boomers and others who have flocked to fixed-income investments really understand bond investing, and the potential risks and rewards?

Many fund companies believe there's a pressing need for investors to bone up on their bond basics, so the companies are putting more resources into the investment products that have been drawing the most new cash. Fidelity upgraded its online resources for bond investors in September, and Nuveen Investments made a similar move this month.

It's a recognition that bonds are more complex than stocks, with more moving parts that influence investment returns: yield, price and interest rates, for starters.

Interest rates are perhaps the most critical risk for bond investors now. Short-term rates are near zero, and have nowhere to go but up. When they eventually rise, if the economic recovery really gets going, expect to see lower bond returns and possibly losses.

The economy is growing so slowly that interest rates aren't likely to spike in the short run. Any increase would be unwelcome for investors.

"It's a phenomenon that bond fund investors haven't faced in a very long time," says analyst Loren Fox of the fund industry consultancy Strategic Insight. "Some will be surprised and disappointed when it happens." Indeed, investors have become accustomed to declining rates for the better part of 30 years.

Below are key points investors should know about bonds, and a snapshot of the potential risks that investors face:

Definition

At the most basic level, bond investors are lending their cash to a company, in the case of corporate bonds, or to government in the case of U.S. Treasurys or municipal bonds.

In contrast, stock investors hold an ownership stake in a company, however small.

Bonds are considered safer than stocks because there's typically a low risk that the borrower won't repay the loan when it's due, or default by failing to make scheduled interest payments.

In contrast, the markets view of a company's profit prospects will vary widely over time, which makes stock prices volatile.

Yield

Bonds pay fixed returns. The yield is the amount an investor receives for holding a bond until the date when it matures, or principal is repaid, expressed as a percentage.

Interest is paid regularly to investors through coupon payments. The coupon is the annual rate of interest divided by the purchase price, meaning a bond selling for $1,000 with a 5 percent coupon rate offers a 5 percent current yield.

Price

Unless a bond is held to maturity, the return investors receive is also a function of price changes. For example, that bond that yielded 5 percent at a price of $1,000 would yield 10 percent at a price of just $500. As a bond's price falls, its yield rises, and vice versa.

Prices change because investors continually process new information about the risks they face from factors such as interest rates, inflation and credit risks -- the potential for a default.

If investors can buy newly issued bonds paying higher interest than previously issued bonds, the value of the older bonds declines. On the flip side, an older bond will rise in price if yields for newly issued bonds are lower.

Individual bonds vs. funds

Investing in individual bonds offers some certainty if the investor holds them until maturity. Investors receive pre-determined interest payments along with repayment of principal, provided the company or government issuing the bond makes good on its obligations.

But it's not easy for an individual investor to research whether a bond is attractively priced relative to its credit risks and other potential pitfalls.

Investing in a bond mutual fund, rather than an individual bond, means an investor faces less risk from the possibility of a default. Bond funds typically hold diversified portfolios of hundreds of bonds. If just a single bond defaults, the impact on the overall portfolio is likely to be modest. However, a fund's returns will vary because the fund manager must continually reinvest as bonds mature.

Because bond prices fluctuate, it's possible for mutual funds to lose money. That can happen when the fund generates less interest income than going market rates for newly issued bonds. And investing in a bond fund means paying fees for professional expertise.

What's more, there's no certainty that expertise will generate returns superior to those investors could get on their own, or by investing in a low-cost bond index fund.

Risks

Bond investors now face substantial long-term risk from rising interest rates. When the Federal Reserve raises rates, returns for different types of bonds will be affected differently depending on factors such as their maturity dates.

For example, one reason that 30-year Treasurys offer a higher return than T-bills maturing in a few months is that there's a greater chance that rates will rise over the long haul, hurting returns. Longer-duration bonds pay investors more to offset that risk.

Inflation is also low, and the eventual likelihood of rising prices poses risks for bond investors, similar to interest rate risks. However, certain types of bonds offer protection. The best known are Treasury Inflation-Protected Securities, or TIPS, a type of Treasury bond whose payout is adjusted every six months for inflation.

Article from The Post and Courier