Get smart - the name is bond

April 1, 2012

Article from The Sydney Morning Herald

Between low-return deposits and high-risk shares, there's a third way, writes Mark Bouris.

THIS week I asked my Twitter followers where they would invest $10,000 to get a good return over 12 months.

The results weren't surprising. Almost two-thirds said they would invest in just three asset classes: property, shares or a savings account.

As a person who has worked in financial services for a long time, I noticed the glaring omission was government, bank and corporate-issued bonds - just 4 per cent of responses thought to invest in them.

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I'm not pouring scorn on these choices - I think it's clear that people don't talk about bonds because they haven't been educated about them.

Simply, bonds are debts. When called a corporate bond, they represent a borrowing made by a company, which offers an interest rate to encourage you to lend to them.

Ironically, a bank-issued bond is very similar to a bank deposit. When you put your savings on deposit, you are literally lending money to a bank. Banks also borrow from big investors by issuing them bonds. As you can imagine, institutions frequently demand higher returns than you get on your savings accounts!

Bonds are an attractive savings destination for many big investors because they offer stable returns with relatively low risk.

For example, today you can get nearly 6 per cent a year on a senior-ranking, variable-rate bond issued by one of the big banks. And many of these investments are very liquid: you can put your money in and take it out whenever you want.

The rate of return you get on the bond is usually tied to how secure it is. This refers to the risk that you will not get paid your interest, much like the way banks think about the risk of you defaulting on a home loan.

If you can get better risk-adjusted returns on bonds, why is it so rare to be offered them?

The financial regulations say the standard minimum investment in a bond is $500,000, which means they are usually limited to the big end of town.

This is supposed to protect ''mums and dads'' from bad decisions. But it's actually unfair because none of you are stopped from buying far riskier bank shares or equities via an online stockbroker.

This is a point you need to understand. Doing so requires me to get back to basics.

Almost all businesses are made up of debt and equity. If you start a new business, you own that business and are the sole shareholder in it. That is your equity. But you might also borrow money from the bank, which is your debt. When a business fails, the shareholders bear most of the risk - they get their money last.

The same principle applies to a home. When you buy a house, you put in cash via a deposit. That is your equity. But you also typically take out a large loan from the bank. When your home's value rises and falls, so does the value of your equity. In contrast, the bank's return is the comparatively secure interest rate on its loan to you.

If you have to sell your house, the bank is paid in full - the equity is whatever is left over, if anything.

Now that you understand this, why shouldn't you be allowed to get access to the lower-risk returns associated with many high-quality bonds?

It's easy for you to buy shares in Westpac but near-impossible to invest in Westpac's AAA-rated covered bonds.

ANZ did retail investors a service by listing one of its bonds on the ASX recently (CBA has done something similar before). Because it is listed, you can buy and sell small parcels of it while getting an attractive 7.1 per cent a year return.

Buying an ANZ bond means you rank ahead of ANZ's shareholders. It's funny to think about it this way but when you invest in a bank's bonds, you are actually being a ''bank to the bank''. You are lending to the bank.

Another option is to invest in a fund or trust managed by professionals who specialise in investing in bonds. You can usually access these funds through a financial adviser.

This is going to be a big topic in the years ahead because retirees, near-retirees and even people in the ''accumulation'' phase of their lives need an alternative to our current bipolar investment world: you either get low-returning bank accounts or the high risk of shares. We need more middle ground.

Super funds have not been helpful in solving this problem. Before the recent crisis, the average ''default'' super fund was putting about 60 per cent to 70 per cent of your money into listed shares. You were being loaded up with risks you didn't need to take to meet your goals.

Get educated about bonds so you can save smarter.

Article from The Sydney Morning Herald

Bond fund investors ride out market’s bumps

Funds, ETFs hold up in quarter, but bulls face new challenges

March 30, 2012, 12:01 a.m. EDT
Article from Market Watch
By Rachel Koning Beals

CHICAGO (MarketWatch) – Is it possible to smoothly downshift this 30-year bond bull run?

Most bond investing experts claim yes, with a proviso: the easy ride hinges on buyers coming to terms with lower returns and rethinking what it means to take risk.

“You can no longer think of Treasurys as an investment, but only a safe-haven,” said Paul Nolte, managing director of investment manager Dearborn Partners. “We’ll probably know a lot more in four to six weeks but if the economy continues to look pretty good, you just have to venture into corporate bonds [or] emerging markets for any hope at investment returns.”

If the first quarter is any indicator, bond market behavior may finally reflect the “new normal” that Pimco’s Bill Gross and others first started talking about a few years back. In the first three months of 2012, long-dated government debt funds fell 5.5%, according to preliminary data from investment researcher Morningstar Inc. Shorter-term government funds were essentially flat.

So far this year, economic data has perked up and stocks posted solid gains. Bonds assumed an expected role, reflecting the “risk-on” approach. Emerging-market bond funds led all categories, with a 7% gain through March 28, according to Morningstar. High-yield bond funds were up 5.5% in the period, while higher-rated multi-sector corporate debt funds were up 4.1%. World bond funds rose 2.2%. In the tax-exempt space, national long-dated muni bond funds rose 2.9%, while high-yield muni funds gained 4.7%.

But the bond market has been fooled before. Each of the past two years started with outperformance of corporates and other higher-yielding areas, including stocks, only to see “investors run for the hills” and the relative safety of Treasurys in the middle of the year before a late-year scamper back to risk, Nolte said. On more than one occasion, lower-risk bond fund returns looked ready to crack and yet each quarter, they defied even expert expectations.

Stay in the lane

Is it different this time? Fund managers steered through the 2008 credit crisis and the still-lingering European debt malaise. Now, a slowing Chinese economy, spotty-if-improving U.S. growth and a volatile oil-price scenario raise concerns for the viability of riskier fixed-income categories. That includes lower-rated company debt and international bonds.

The Fed has pegged short-term rates at ultra-low levels and it’s buying longer-term paper to push down mortgage rates, but that program will run out in coming months.

In its attempt to stay a step ahead of the Fed, the bond market sold off in the early year. Treasury prices fell perhaps a little too fast. Falling prices push up yields as the market was pricing in higher future interest rates.

As the “new normal” camp made its case in recent years and again to start 2012, fund managers got a boost of confidence in their view from none other than Federal Reserve chief Ben Bernanke. He stepped in with an ABC evening news appearance and delivered a renewed pledge for low rates until late 2014. The market correction paused.

While Bernanke took to the airwaves, Rick Rieder, BlackRock’s chief investment officer of fixed income, fundamental portfolios, penned a column for The Financial Times to boost the bond bulls’ case:

“We have all heard the bears’ case for bonds: with governments and consumers in the developed world drowning in debt and negative real interest rates on many sovereign bonds, yields can only rise — quickly,” he wrote. “Not so fast: The confluence of profound supply and demand factors, with a dash of monetary policy distortion thrown in, will ensure bonds remain well-bid — and interest rates capped — for years to come.”

The reason? Supply, for starters. The U.S. bond market is smaller since the financial crisis. And, banks are issuing fewer bonds as they deleverage and cut risk under new regulations. Demand is another factor. Pension funds will remain buyers and will want a deeper bond mix to boost yield.

Rieder, who oversees some $615 billion in assets, ventures the only “bubble” in the bond market appears to be the “overinflated talk of bond market bubbles in recent years.”

Pick your spots

The fixed-income world’s guarded confidence hinges on the fact most tossed out the manual a while ago, no longer expecting bonds to behave a certain way and stocks to assume the counter position for a reasonable amount of time. Targeted domestic bond investing in search of yield, yet mindful of duration risk and credit quality, and a preference for emerging market paper over sovereign issuance are strategies that have paid off and may continue to do so.

“There’s an interesting dichotomy at work,” said Paul Matlack, U.S. fixed-income strategist with Delaware Investments. “The economic recovery may be touch-and-go but U.S. corporations are in the best shape they’ve been in for years.”

“Companies really cut to the bone, in fact probably over-fired in 2008 and shuttered plants. Now, profitability has skyrocketed. They’re refinancing debt. Large companies now have tremendous access to bank capital and the debt markets,” he said.

Morgan Stanley Smith Barney is taking a tactical approach. The firm’s analysts believe that developed-market central-bank policy rates are likely to remain low for years, a third round of Fed Quantitative Easing could be likely later this spring, and that the European Central Bank’s QE equivalent has been a success.

Meanwhile, a few emerging market central banks have already begun easing to offset slower developed-market growth. The firm is overweight cash, short-duration bonds, investment grade bonds and managed futures. It suggests an underweight to developed-country sovereign debt, high yield bonds, equities, commodities, global real estate investment trusts and inflation-linked securities. Emerging-market bonds receive a market-weight.

Pimco favors high quality, shorter duration and inflation-protected bonds; dividend paying stocks with a preference for developing over developed markets; and inflation-sensitive, supply-constrained commodity products.

Once again managers are hopeful they won’t yet have to toss out the “new normal” label — ultra-low overall rates and improved corporate conditions. The bigger challenge appears to be conditioning investors to think about bonds differently than they have for decades.

Gross put it this way in his latest commentary: “Total return as a supercharged bond strategy is fading ... As we delever, it will be hard to deliver what you have been used to. Should you desert bonds simply because they may return 4% as opposed to 10%? I hope not.”

Rachel Koning Beals is a Chicago-based freelance writer. 

Article from Market Watch

TREASURIES-Bonds rise on outlook for supportive Fed policy

Article from reuters

Tue Mar 27, 2012 5:05pm EDT

* Dovish Bernanke views foster lower yields

* U.S. consumer confidence pulls back slightly in March

* Fed bought long-dated bonds

* U.S. Treasury sells 2-yr notes in well-bid auction

By Ellen Freilich

NEW YORK, March 27 (Reuters) - U.S. Treasuries prices rose on Tuesday, assisted by Federal Reserve Chairman Ben Bernanke's signal early this week that the U.S. central bank would keep monetary policy accommodative in order to quicken economic growth and cut unemployment.

Bernanke's view on sluggish U.S. growth being inadequate to reduce U.S. unemployment held out the promise of further easing by the Fed, a move markets had begun to back away from after reports showed signs of life in the labor market.

In an interview with ABC News set for broadcast later this evening, Bernanke spoke again in the same vein, saying it was important not to be complacent about the health of the U.S. economy. Asked about the potential for more large-scale Fed purchases aimed at keeping long-term interest rates low, Bernanke said the Fed was taking no options off the table.

"Bernanke has been fairly dovish of late and that put a little bit of fear into some people who had thought more quantitative easing was further away; so people are covering their shorts," said Scott J. Graham, head of government bond trading at BMO Capital Markets.

"First you had people taking positions off and that caused some imbalances, and now, we're going the other way," he said.

Demand for Treasuries was evident in the government's sale of $35 billion in two-year notes offering the highest yields in an auction of that maturity since July 2011.

The indirect bid was the largest since November at $19.1 billion, said Thomas Simons, money market economist at Jefferies & Co. in New York.

Benchmark 10-year notes were up 15/32 in late trade, their yields easing to 2.20 percent, below the 200-day moving average of 2.2170 percent.

The 30-year bond was up 27/32, its yield easing to 3.29 percent from 3.34 percent on Monday. The 30-year is below its 4-1/2-month high of 3.4920 percent set last Monday and its 200-day moving average of 3.3672 percent.

Matthew Duch, lead portfolio manager for the Calvert Government Fund at Calvert Investments, a fund group with more than $12.6 billion in assets under management, said flows were light.

"We're getting slow, steady growth," he said. "The Fed is doing everything they can do to accelerate the economy."

On Monday, Fed Chairman Bernanke cautioned that U.S. growth remains too low to reduce unemployment much further. The jobless rate stood at 8.3 percent in February.

The better U.S. jobs picture has lifted consumer sentiment in recent months, but a report on Tuesday hinted that improvement might be hitting a plateau due to rising gasoline prices. The Conference Board said its U.S. consumer confidence index slipped to 70.2 in March from an upwardly revised 71.6 in February.

Deutsche Bank Securities director and senior U.S. economist Carl Riccadonna said too much was being made of the rise in gasoline prices to $4 a gallon.

"The move up in gas prices has gotten a lot of attention in the media," he said. "That makes for great headlines, but in fact gas prices are rising in line with the usual seasonal pattern, which typically shows sharp increases in the first half of the year going into the summer driving season and then falls off in late summer, early fall."

After its two-year note auction on Tuesday, the Treasury will sell $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

The auctions come as corporate bond issuance is setting records as firms borrow money at low interest rates.

Investment-grade companies set a record for issuance in the first quarter, at $274.5 billion. That surpassed the previous high of $272.3 billion five years ago before the financial crisis began, according to IFR, a unit of Thomson Reuters.

Prior to the two-year note sale, the Fed bought $1.97 billion in long-dated Treasuries due Feb. 2036 to May 2041.

Article from reuters