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Why emerging market bonds have seen inflows in 2014
Emerging market bonds have been one beneficiary of today’s low yield environment. Is it too late to allocate to this asset class?
The yield for 10-year Treasuries stands at 2.3%, whereas high yield bonds are returning close to 6%. Although the spread has narrowed by a record amount, you may still consider buying high yield bonds.
Lower international bond yields mean there are few alternatives within the fixed-income sector other than high yield bonds. But these aren’t as risky as they used to be.
The Fed’s bond buying program, which ended last month, put downward pressure on Treasury yields. Meanwhile, bond yields of countries around the world are even lower.
High yield bonds perform well when the economy improves. This should be intuitive as corporate earnings improve along with the economy, which means that default rates fall.
I continue to see relative value in select areas of the fixed income market such as tax-exempt bonds, commercial mortgaged-backed securities (or CMBS) and U.S. high yield.
In this environment, many investors are still determined to wait out the bond market, believing that rates will eventually normalize and provide investors with a risk-free 5% yield, though this isn’t likely to happen anytime soon.
Stubbornly low yields have made income tough to come by in recent years, and they have sent investors searching for yield and income wherever they can find it.
The US Department of the Treasury increased the weekly auction amounts for four-week, or one-month, T-bills last week. The issuance was $40 billion.
The auction demand for 13-week Treasury bills (or T-bills) was almost unchanged from the previous week. The bid-to-cover ratio came in at 4.7x.
The US Department of the Treasury held the weekly 26-week, or six-month, Treasury bills (or T-bills) auction on November 10. T-bills worth $28 billion were on offer.
Despite unchanged issuance, demand for 52-week T-bills was weak. The bid-to-cover ratio fell 7% to 3.6x month-over-month—the lowest level recorded since December 2009.
Treasury yields are closely related to economic data. Bullish economic data tends to raise yields. This lowers bond prices and vice versa.
After trending to 14-year lows over the past two weeks, the four-week moving average for initial jobless claims moved up by 6,000 to 285,000 in the November 8 week.
The most important release was the monthly retail sales for October. The report is an important yardstick for consumer confidence and spending.
The US Treasury holds monthly auctions for three-year Treasury notes (or T-notes). Yields for the three-year T-notes are related to movements in the federal funds rate.
The US Department of the Treasury holds a ten-year Treasury (IEF) notes auction every month. The ten-year Treasury (UST) yield is a benchmark yield for financial markets.
The monthly auction for 30-year Treasury bonds (or T-bonds) was held on November 13. Auctions are watched by stock and bond investors.
It’s important that investors are updated on Treasury (TLT) yield movements. Treasury yields are used as benchmarks to determine the required returns on other assets.
You’ll find that the principal appreciation from falling rates at the long end (IEF)(VCLT) may make up for a large part of the shortfall in yields at the short end (SJNK).