Bonds: Last gasp before the August calm

Part 3
Bonds: Last gasp before the August calm (Part 3 of 5)

Reversal on the horizon for fixed income bonds

Reversal on the horizon

Once tapering begins, longer-date bonds will drop and yields will increase, which may steepen the full interest rate curve and, as a result, drop the prices of bonds for all maturities. Plus, tapering would send a message of confidence in the economy, which would reduce demand for bonds.

Despite the correction of interest rates that pushed up the ten-year Treasury from between 2.0% and 2.2% to its current trading band of 2.5% to 2.7%, the prices may still not fully reflect an actual hard start date. Besides, the record volumes and rosy fund flows are showing that investors are quick to forget.

US Leveraged Loan Flows 2013-08-14Enlarge Graph

Fund flows rebound

Fund flows rebounded significantly last week, reaching $1.4 billion versus $0.4 billion the week before. While this value is still below the huge $1.7 billion spike the week prior, it certainly shows that investors are still willing—at least for one last week—to speculate on bonds.

Nonetheless, as we’ve discussed, the statements by three Fed presidents are likely to dampen investor excitement.

August slowdown?

August is usually a slow month, though this year, investors have pushed well into August, squeezing the last yield of the bond market (BND). The strong volumes from last week, though, may be the result of several issuers piling in before most of the dealmakers go on vacation.

If issuance volumes drop by the end of this week, the secondary market is likely to slow down as well. By the time the August vacation is over, the September tapering will be upon us. So right now may be a good time to hedge or get out.

Read on to see how the high yield bond market has behaved recently.

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