Bonds yields fall on Libyan unrest

Click the chart for more on bonds. By Julianne Pepitone, staff reporter
February 22, 2011: 1:54 PM ET

NEW YORK (CNNMoney) — Bond yields have been exceedingly low in recent weeks, and the turmoil roiling the Middle East and North Africa sent them even lower Tuesday.

Civil unrest in Libya has entered its eighth day, fueled by protestors against dictator Moammar Gadhafi’s 42-year reign and high unemployment.

Pro-democracy protests have rippled through Bahrain, Iraq and Tunisia as well, following the political protests that have continued in the streets of Egypt since January 25. Political unrest tends to send bond prices higher, as investors look for safer investments.

"It’s about the unrest, the fear of instability," said Bill Larkin, portfolio manager at Cabot Money Management. "If Gadhafi goes, then what’s next? What replaces these governments?"

World financial markets felt the blow, with stocks falling in the U.S. and across Asia, and markets in Europe under pressure.

Beyond the Middle East, investors were also digesting a raft of domestic data released Tuesday.

Consumer confidence, as measured by the Conference Board’s monthly index, rose to a 3-year high in February. But national home prices fell 4.1% during the last three months of 2010, compared with the same period the previous year.

"In housing, things are still sort of in that dire zone, still weak," Larkin said. "But that could solve itself over time. One plus of low bond yields is that mortgage rates will stay low."

But those low yields make it difficult to attract investors to Treasuries, Larkin said.

"It’s very tough to find a reasonable return in the bond market right now," Larkin said. "You can buy a corporate or a muni bond with a historically lower default rate, and get a higher yield. You’ve got to look all across the fixed-income market to seek out the opportunities."

What yields are doing: The 30-year yield fell to 4.60%, the 2-year yield ticked down to 0.55% and the 5-year yield dropped to 2.14%.

The 10-year note’s yield was at 3.46% in afternoon trade, down from 3.59% late Friday. The bond market was closed Monday in observance of Presidents’ Day. 

NEW YORK (CNNMoney) — Junk bonds have had a stellar couple of years, and it’s not over yet.

Investors have poured almost $72 billion into the high-yield bond funds since the start of 2009, according to EPFR Global. And that has driven junk bond yields to near record lows.

 

The average yield of bonds included in the Bank of America Merrill Lynch High Yield Master II Index stood at a whopping 19.5% at the start of 2009. Since then it has dropped to 6.98% — just a stone’s throw from the record low of 6.86% hit in December 2004.

Though that seems to suggest that the high-yield debt market is too expensive, experts say ‘not so fast.’

Track bonds and rates

"Yields are low, but you have to take a step back and also look at spreads, which is the premium that high-yield bonds are trading at relative to risk-free Treasuries," said Sabur Moini, portfolio manager of the Payden High Income Fund (PYHRX). "If you do that, you’ll see that you’re still being compensated well for holding high-yield bonds."

Though the spread between junk bonds and Treasuries is narrower today, at about 444 basis points, than the historical average of 525 basis points, investors still find it appealing.

"The Federal Reserve’s policies have created a low interest rate environment, and rates are low in virtually every asset class," said Marc Gross, portfolio manager of the RS High Yield Bond Fund (GUHYX). "Investors should consider high-yield bonds on a relative basis, not on an absolute basis."

For example, the spread between junk bonds and Treasuries was much tighter in June 2007, at 250 basis points, when the average junk bond yield was between 7% and 8%.

0:00 /3:56How to invest in 2011

In addition to having an attractive risk premium, the high-yield market is also much healthier than it has been in the past.

The junk bond default rate now sits at 3.1%, down from 14.6% in November 2009, according to Moody’s Analytics. And it’s expected to fall to 1.9% by the end of the year, thanks to stronger corporate balance sheets.

"The high-yield bond market’s fundamentals are very healthy right now, and they should be for a couple more years," said Payden & Rygel’s Moini, whose portfolio include high-quality credit issued by Chesapeake Energy (CHK, Fortune 500), EchoStar (SATS), Ford Motor (F, Fortune 500) and Cablevision (CVC, Fortune 500).

Moini added that the high-yield bond market is already up more 3% this year, and should return between 7.5% and 8% in 2011. Though that’s not as strong as the market’s 58.2% return in 2009, 15.1% return in 2010, or what you might gain by investing in stocks, it’s enough to make it a good bet.  

 

Warning: Bond market volatility ahea

By Julianne Pepitone, staff reporter

February 17, 2011: 12:38 PM ET

NEW YORK (CNNMoney) — The bond market has been rocky over the past month, and analysts say we’re in store for a rollercoaster ahead.

Investors have a lot on their minds: the deficit, interest rates, inflation and Middle East unrest, as well as continued recovery concerns. And concern is growing that Treasury yields are too low.

"Going forward, the market is going to be more volatile than it’s been in a long time," said Kenneth Naehu, managing director and head of fixed income at Bel Air Investment Advisors.

"The current market isn’t one for people to buy in and then sit there," he added. "You need to be actively watching your exposure."

Traders are starting to look "a year plus down the road," Naehu said, especially for longer-term Treasuries. They’re also keeping a close eye on bond yields.

The 10-year yield had been stuck in a month-long rut below 3.5%, but it has ticked slightly higher over the last two weeks. But the benchmark note’s yield — which affects interest rates on everything from savings accounts to home loans — has struggled to move much higher than 3.6%.

"There have been concerns that yields have been too low for some time now," Naehu said. "Aside from recessionary fears, the market has been concerned that at some point inflation will rear its ugly head."

Eyes on inflation: A key measure of inflation came in near expectations Thursday. The consumer price index rose 0.4% over the month in January, compared to expectations of a 0.3% increase. Core CPI, which strips out volatile food and energy prices, rose 0.2%.

"The bond market is starting to concern itself with what happens later," Naehu said. "Traders are getting worried about the deficit, and they think the current administration’s outlook is overly optimistic."

Investors are also looking to see how the government wraps its quantitative easing plan that was announced last year, in which it will have purchased $600 billion of Treasuries by the second quarter of 2011.

Middle East in focus: Naehu said traders were holding their positions and watching the political protests that have continued in the streets of Egypt since January 25. But pro-democracy protests are starting in other Middle East countries.

Bahrain’s health minister said Thursday that at least three people were killed and more than 200 were injured after security forces stormed an encampment of pro-democracy protests.

In Iraq, nine people were killed and 47 were injured Thursday when protesters clashed with security forces in Sulaimaniya. Surges of dissent have also rippled through Tunisia and Libya.

What yields are doing: The 30-year yield ticked down to 4.66%, the 2-year yield held at 0.65% and the 5-year yield slipped to 2.28%.

The 10-year note’s yield was at 3.58% in midday trade, down from 3.62% late Wednesday. 

Treasuries fall in wake of jobless claims

Click chart for more bonds data. By Charles Riley, staff reporter   February 10, 2011: 3:53 PM ET

NEW YORK (CNNMoney) — Treasury prices edged lower Thursday as investors reacted to a better-than-expected government report on initial unemployment claims and a bond auction.

The yield on the benchmark 10-year note rose to 3.71% after hovering near 3.69% earlier in the day.

Bond yields and prices move in opposite directions.

The jobs report showed that the number of Americans filing first-time claims for unemployment benefits fell to 383,000 last week — the lowest number in two-and-a-half years.

"The jobs report lends credence to the outlook that labor market is really improving," said David Coard, head of fixed-income trading at Williams Capital Group. "There may be some weather-related noise, but over the last several weeks, the trend definitely looks downward."

Later Thursday, the Treasury auctioned off $16 billion in 30-year bonds, following a robust 10-year note auction on Wednesday that Coard described as "smashing."

Wednesday’s auction produced a bid-to-cover ratio of 3.23 times, which indicates extremely strong demand. Thursday’s auction yielded a bid-to-cover ratio of 2.51.

In addition to the auction, investors are also keeping a close watch on Egypt, where reports indicate that weeks of protests may culminate in the resignation of President Hosni Mubarak.

Coard said that tumultuous geo-political events have provided support for Treasury prices in recent weeks, as investors have sought the safe haven of U.S. Treasury bonds.

"Mubarak’s resignation, should it occur, would definitely cause the flight-to-quality bid to fade," Coard said. 

 Fixed-income investors said this multi-day rise is due in part to expectations of a generally-improving economy and lingering, but more concrete, concerns about inflation.

After hitting a 10-month high on Tuesday of 3.72%, the yield on the benchmark U.S. 10-year note fell to 3.67% on Wednesday following the strong results of the government’s 10-year note auction.

Despite the minor pullback, the yield on the 10-year has risen 0.3 percentage points in little more than a week. Before this move, the 10-year note remained mostly in a range between 3.3% and 3.4% since mid-December.

While the recent move in longer-term Treasury rates is noticeable, bond yields have actually been trending higher since November. That may be because the Federal Reserve’s $600 billion quantitative easing program is beginning to have its intended effect of providing stimulus to the economy, investors said.

"All of the economic indicators show an improving economy and the possibility of higher inflation" said William Larkin, portfolio manager with Cabot Money Management. "Bond investors are selling into that." (Bond prices and yields move in opposite directions.)

Federal Reserve Chairman Ben Bernanke said on Wednesday he had taken note of the recent rise in bond yields, but said such movements were expected.

"I’m not concerned," Bernanke said, in response to a question from a member of the House Budget Committee. "I think it reflects primarily increasing optimism about the U.S. economy, and it’s natural for [Treasuries] to move in that way when investors become more optimistic about growth."

The more traditional government inflation indicators have remained tame for months now — January’s U.S. consumer price index showed a modest 0.8% year-over-year increase in core inflation — but food and energy prices have risen sharply.

Oil prices are up 8% in the past six months while wheat and corn prices are up 20% and 60% respectively in the same time period.

"The inflation readings that the Fed uses show no concerns about inflation but the market is starting to price in the risk of inflation," said Mike Pond, chief fixed income strategist with Barclays Capital.

Traders said with this momentum, the 10-year note could reach the 4% yield mark. But most consider a pause in the 3.7% to 3.8% range to be more likely.

"If the market becomes more concerned about these long-term budgetary problems and inflation, I don’t think a 4% 10-year is out of the question," Pond said.

Also weighing on Treasuries is the $72 billion in long-term bonds the U.S. government is auctioning off this week.

After Tuesday’s disappointing 3-year auction, the Treasury Department auctioned off $24 billion in 10-year notes at a yield of 3.67% on Wednesday. The yield was lower than where bonds had been trading earlier in the day, a sign of strong demand.

"Increased volatility and sentiment swings are something you will likely need to get used to, either as a player or a spectator," said Kevin Giddis, president of Fixed Income Capital Markets at Morgan Keegan, in a research note. "With the Fed leaving the 30-year bond off the current QE2 buying list, the movements of this end of the curve will be forced to rely on fundamentals, volume, trends and hearsay, and that will likely mean a rollercoaster of ups and downs."