Rule change puts bonds in the spotlight

Gareth Hutchens
March 26, 2012
Article from The Sydney Morning Herald

 

The head of fixed income at UBS, Duncan Haig, accepts that bonds are not the most exciting investment. Photo: Quentin Jones

TELLING someone what he does for a living, Duncan Haig is the first to admit, often has people's eyes glazing over.

"We're the pessimists on the dark side of the room, the bright side's down there," says Mr Haig, the head of fixed income at UBS, pointing to the equities traders.

"What's your son do? Oh, he works in the sharemarket or money market or something," jokes colleague Andrew Clark, head of interest rate sales.

Despite all the chaos in global bond markets in recent years, or their crucial role in the massive stimulus packages pushed through by governments around the world, Clarke jokes traders' parents still have no idea what they do.

Large-scale privatisations of Telstra or the Commonwealth Bank have in the past helped Australians fall in love with shares. But bonds, seen as a more stable and less risky asset class than property or equities, are still largely a mystery.

The former head of the federal Treasury, Ken Henry, recently warned about Australians' lack of interest in fixed income and what it meant for the performance of their portfolios in times of crisis.

Since 2007, the market value of the UBS composite bond index — which is used as a benchmark index for 90 per cent of Australia's fixed interest funds — has nearly tripled in size, growing from $207 billion to more than $596 billion.

But that could all be about to change. This year, the Australian Securities and Investments Commission changed the rules to allow bonds, called fixed-income products, to be listed on the stock exchange in exchange-traded funds (ETFs).

That means investors can get exposure to bonds in similar ways to equities.

Last week, iShares launched a range of fixed-income ETFs, using the UBS indices and the Australian Securities Exchange expects at least 10 ETFs to be listed by June.

It has been 25 years this month since the UBS bank bill index, which measures the performance of Australia's short-term money market, was introduced.

Article from The Sydney Morning Herald

Bond Sales Revisit ’09 Highs as Plunging Yields Entice Borrowers

Bloomberg News

By Katie Linsell and Hannah Benjamin on March 23, 2012  

Article from Bloomberg Businessweek

European companies sold 11.5 billion euros ($15 billion) of bonds in the busiest week of issuance in 2 1/2 years as borrowers took advantage of record- low yields and pent-up investor demand for the debt.

Fiat SpA (F), Italy’s biggest manufacturer, steel producer ArcelorMittal and Jaguar Land Rover Plc sold bonds as non- financial corporate sales reached the highest since September 2009, according to data compiled by Bloomberg. Issuance this year now stands at 77 billion euros, the most in a quarter since March to June 2009 when companies raised 95.7 billion euros.

The European Central Bank’s injection of more than $1 trillion into the financial system eased concern that the region’s sovereign debt strains will trigger defaults. Corporate bond yields plunged 60 basis points this year to 2.7 percent, close to last week’s record 2.6 percent, Bank of America Merrill Lynch’s European Corporates Non-Financial Index shows.

“A lot of issuers have taken the opportunity to issue at record-low yields,” said Orjan Pettersson, a fund manager at SEB Asset Management in Stockholm, which oversees 5 billion euros of assets. “We also see a lot of inflows into our corporate bond funds so there is very strong underlying demand as well. The LTRO was a trigger for a radical sentiment shift.”

Moody’s Investors Service cut its 2012 global default rate forecast to 2.6 percent on March 8, from 2.8 percent the previous month. The New York-based ratings firm said it expects “historically low” default-rate levels to “continue over the near term while recognizing that significant risks remain.”

Sales ‘Burst’

The extra yield investors demand to buy company bonds instead of benchmark German government debt narrowed 61 basis points since December to 140, or 1.4 percentage points, Bank of America Merrill Lynch data show. The spread narrowed to 139 basis points March 16, the smallest gap since August.

“We’ve clearly had a burst, but we need to see how the lingering sovereign situation continues to pan out when considering whether it can continue,” said Harpreet Parhar, a credit strategist at Credit Agricole SA in London.

Investment-grade corporate bond funds in Europe are attracting the most money in almost three years. Investors funneled 2 billion euros into high-grade funds in January, the biggest inflow since July 2009, according to Chicago-based Morningstar Inc.

Fiat, which had its credit rating put on negative watch by Standard & Poor’s last month, sold 850 million euros of five- year securities, in its first bond sale since July 5, data compiled by Bloomberg show. The securities were priced to yield 594 basis points more than German government debt.

The Turin-based company is rated Ba2 by Moody’s, two levels below investment grade, and BB by S&P, which said last month it may lower the rating one more level by May.

Jaguar, ArcelorMittal

Jaguar Land Rover, the luxury vehicle unit of India’s Tata Motors Ltd., sold 500 million pounds ($795 million) of six-year notes in its first issue since May 2011. The Gaydon, England- based company’s securities were priced at a spread of 647 basis points more than U.K. government bonds. Jaguar Land Rover is rated B+ by S&P and B1 by Moody’s.

ArcelorMittal (MT), the world’s largest steelmaker, sold 500 million euros of six-year bonds that were priced to yield 343 basis points more than government debt. The Luxembourg-based company is rated BBB- by S&P, the lowest investment grade level, and Baa3 by Moody’s.

To contact the reporters on this story: Katie Linsell in London at klinsell@bloomberg.net; Hannah Benjamin in London at hbenjamin1@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

Article from Bloomberg Businessweek

Warm Days and Thunderstorms: Bond Prices Are Rumbling

Michael FarrPresident and majority owner, Farr, Miller & Washington, LLC

Posted: 03/21/2012 1:30 pm

Article from The Huffington Post

Spring arrived early for 2012. In spite of the predictive powers of Punxsutawney Phil, the cherry trees along the Tidal Basin next to the National Mall are in full bloom -- weeks ahead of their "normal" cycle.

Spring brings us out of the dullness of a barren winter and helps remind us that change is inevitably constant. Faced with this reality, smart investors continually seek to manage unforeseen risks and uncertainties. We at Farr, Miller & Washington have a balanced approach to portfolio management. We seek investments that are likely to benefit from the long-term growth in the global economy. At the same time, we place high value on an investment's ability to withstand turbulent economic times. This approach has suited us well since we opened our doors in 1996. 

The bond market has become a source of consternation for many investors in recent years. Following a 30-year trend of falling interest rates, many investors justifiably wonder if bonds are a smart investment. We have our opinion, but we don't have a definitive answer. In any event, bonds do have a place in many investor portfolios, depending on a variety of different factors. In general, many of our clients hold bonds to provide stability and income to their portfolios. Typically, when the equity markets deflate, bonds get a breath of fresh air and smooth the overall portfolio values. 

Last week we saw the other side of the coin as the DOW surged through the 13,000 barrier, hitting highs that have remained untested since pre-crisis 2007. Yields on the 10-year Treasury, in turn, leapt from below 2% to the current (as of this writing) return of 2.38%. Remember that as bond yields rise, bond prices fall. 

During historical economic recoveries, bond prices fared a good deal worse than they have in the current recovery. This is because the Federal Reserve and Treasury Department have taken enormous actions to keep yields low, thereby increasing the odds that the recovery becomes self-fulfilling. The recent year's experience of near-zero interest rates has been unexpected. But it may be that we are seeing the rate tide turn. 

Past Farr Views have warned of risks to bondholders in rising rate environments. The current jump in the 10-year yield from 1.85% in January to 2.38% on March 19th meant that the price fell from $101.35 to $96.66, or 4.6%. Obviously, investors who purchased 10-year notes with a 1.85% yield to maturity will suffer if they have to sell today. Moreover, returns will only become more negative as yields rise further. Should rates rise to 4%, the price on the US Treasury 2% of 2/15/22 will fall to $83.78.

Naturally, there is no way to know whether this jump in rates is just a blip or the beginning of a trend. But being aware of potential threats is every investor's job. Our strategy for bonds has been defensive for some time. Average maturities and durations have been shorter, and purchases have been well-researched and opportunistic. 

If you own bond mutual funds, check the price action over the past couple of months. If your exposure to rising interest rates is unacceptable to you, it may be time to consider re-allocation. Interest rate movements affect almost every type of investment in some way, but bond investments will react with direct negative correlation. The rule for bond investing is that the lower the coupon and the longer the maturity, the more volatile prices will be. Therefore, higher coupons and shorter maturities mitigate volatility, and therefore, risk.

The tide in the Tidal Basin may be changing. As soothing as 80 degree March afternoons can be, we diligently prepare to avoid the bite of a late market frost. Understanding that risk exists is the first step in combating it or taking advantage of it. Be careful out there. 

Article from The Huffington Post