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Should you invest in non-traditional bond funds now?
Some bond funds use low or negative portfolio durations to reduce the returns volatility in the portfolio. Meanwhile, the portfolio composition determines how much the value of the portfolio changes in response to duration.
Legendary bond investor Bill Gross left Pacific Investment Management Co. (or PIMCO) in September, causing investors to exit en masse from PIMCO-sponsored funds. Total outflows for all of PIMCO’s funds were estimated at $23.5 billion in September.
There are a number of options available to those interested in investing in these funds. We’ll look at the key fund characteristics of the more prominent players. But investors are advised to read the respective fund prospectuses for more details.
Without a benchmark, it’s difficult to compare performance. Since each fund is different, you should read the fund’s prospectus and investment mandate before investing. This will ensure that the fund’s risk and return objectives match your own preferences.
Low or negative growth in Japan, China, Brazil, and the Eurozone countries has caused central banks to embark on monetary easing. This has resulted in lower yields on government debt issued by these countries.
Duration measures the change in the bond price if there were a 1% interest rate change. If the duration is five years, a 1% increase or decrease in interest rates would cause a respective ~5% decrease or increase in the bond price.
The Fed held its seventh Federal Open Market Committee (or FOMC) meeting on October 28-29. The FOMC statement will release on Wednesday, October 29. The slew of positive data and earnings last week may tip the balance in favor of ending asset purchases.
Last week’s U.S. Department of the Treasury auction for one-month Treasury bills (or T-bills) was held on October 21. Treasury bills (MINT) worth $34 billion were auctioned, which was $1 billion more than the previous week. Despite the higher supply, the bid-to-cover ratio came in higher than the previous week, and market demand rose.
The U.S. Department of the Treasury held the weekly auction for three-month Treasury bills on October 20. Market demand, which consists of direct and indirect bids, rose to 26.9% of the competitive bids, compared to 24.8% at the previous week’s auction.
The U.S. Department of the Treasury auctioned Treasury bills (or T-bills) worth $88 billion in the week ending October 24. Although auction demand was higher in absolute terms, the bid-cover ratio dipped, and market demand was lower due to lower indirect bidding.
ETFs tracking broad-based stock market indices were up due to positive economic and earnings data. Secondary market flows into investment-grade bond mutual funds were positive for the 19th consecutive week.
Better U.S. economic data, along with upbeat corporate earnings, proved bullish for stocks in the week ending October 24. Treasury yields between two years and 30 years rose last week, the largest increase for five-year and seven-year Treasuries.
Last week, U.S. economic data covered a number of sectors, including housing, employment, manufacturing, and inflation. All three housing indicators released last week were positive, and initial jobless claims once again beat market expectations. The CPI for September came in at an annualized rate of ~1.7%, the fourth straight monthly decline.
The LEI Index surged by 0.8% in September, beating expectations of a 0.6% gain. Nine of the ten LEI components reported an increase, a big positive for the U.S. economy.
The high yield at the Treasury Inflation-Protected Securities (or TIPS) (TIP) auction held on October 23 came in at 0.985%, the lowest level in the period since the auctions were resumed in February 2010. The relatively higher yields just prior to the auction resulted in lower prices, benefiting buyers.
Last week, the U.S. Treasury auctioned securities worth $95 billion. These included Treasury bills and Treasury Inflation Protected Securities (or TIPS). TIPS offer bond investors protection against rising inflation. Despite the low bid-cover ratio, market demand for the securities rose.
Financials sector borrowers were major issuers in the primary market. Verizon’s $6.5 billion, three-tranche issue was the largest debt deal of the week.
As firms released Q3 earnings, they were no longer subject to the corporate blackout periods preceding earnings releases. A number of U.S. companies took advantage of the lower yields and credit spreads to issue debt for the purpose of refinancing older and costlier borrowing.
But investors may want to consider avoiding one hedge: Treasury Inflation-Protected Securities (TIPS). While TIPS will protect purchasing power, this protection comes at a hefty price.
In today’s environment of moderately rising (albeit still historically low) rates and tight spreads, we at BlackRock believe that investors should consider allocating at least a portion of their fixed income portfolios to balanced approaches.