Bonds Erase ’13 Losses as Three-Decade Rally Defies Bears
Bonds of issuers worldwide from Morgan Stanley (MS) to the Spanish government have erased losses for 2013 as reports of the death of the three-decade bull market in the securities prove premature with the Federal Reserve maintaining its stimulus.
Returns this month of 0.88 percent on the Bank of America Merrill Lynch Global Broad Market Index bring gains since year-end to 0.4 percent. Seven weeks ago, before central bank policy makers surprised investors by delaying cuts in monthly purchases of $85 billion of Treasuries and mortgage bonds, the measure was down 2.1 percent.
Borrowing costs for corporate, sovereign and securitized debt have fallen to 1.92 percent, within 0.5 percentage point of historic lows, five months after Pacific Investment Management Co.’s Bill Gross said that the rally had probably ended. BlackRock Inc. Chief Executive Officer Laurence D. Fink said a scaling back of quantitative easing could come as late as next June.
“As long as the Fed is buying, it provides liquidity in the bond market which spreads out into all asset classes,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., which oversees $350 billion, said in a telephone interview. “Everything really does tie back to the U.S.”
The gains are being led by corporate bonds, which have returned 1.43 percent this month versus an 0.81 percent gain for sovereign debt.
Demand for emerging-market securities is building with Pakistan planning to raise as much as $1 billion in a bond sale, its first offering abroad since 2007, according to a Finance Ministry official, who asked not to be identified without authorization to speak publicly. Brazil sold $1.5 billion of dollar notes due 2025 to repurchase outstanding debt maturing from 2017 to 2030. It also exchanged $1.7 billion of bonds with holders of existing securities.
As evidence of the reviving appetite for risk, safeguards on speculative-grade debt dropped to a record low last month as measured by a Moody’s Investors Service index of covenant quality. The index, which tracks bonds sold by North American companies, rose to an unprecedented 4.05 in September from 3.85 in August. A reading of 5 is the weakest and 1 is the strongest.
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. increased, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, adding 0.4 basis point to a mid-price of 72.4 basis points as of 10:46 a.m. in New York, according to prices compiled by Bloomberg.
The measure typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
A gauge of the health of U.S. financial conditions fell for a third day. The Bloomberg U.S. Financial Conditions Index, which combines everything from money-market rates to yields on government and corporate bonds to volatility in equities, decreased 0.02 to 1.48. The gauge, which falls as conditions deteriorate, reached 1.57 on Oct. 21, the highest in data dating back to January 1994.
Bonds of Verizon Communications Inc. (VZ) are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 5.4 percent of the volume of dealer trades of $1 million or more, Trace data show. The New York-based telephone carrier raised $49 billion on Sept. 11 in the largest corporate bond issue ever.
The global bond market is poised for positive returns in 2013 for the first time since June following average gains of 5.4 percent in the five years ended last December, Bank of America Merrill Lynch index data show.
Morgan Stanley’s $78.2 billion of bonds in the Bank of America Merrill Lynch Global Broad Market Index have gained 3.94 percent this year. The New York-based bank reported third-quarter earnings on Oct. 18 that beat analysts’ estimates as equity-trading revenue jumped the most among the biggest Wall Street firms and profitability at its brokerage unit rose.
The Spanish government’s $750.3 billion of securities on the index have gained 10.4 percent this year. Spain emerged from a two-year recession in the third quarter, with gross domestic product expanding 0.1 percent from the three months ended in June, when it shrank 0.1 percent, the Madrid-based Bank of Spain estimated in its monthly bulletin yesterday.
Global returns have slowed from this year’s peak of 1.92 percent in May before Fed Chairman Ben S. Bernanke rattled markets by saying the central bank could taper record stimulus if the economy showed sustained improvement.
As yields rose from a record low 1.51 percent, Gross, the manager of Pimco’s $250 billion Total Return Fund (PTTRX), wrote in a Twitter post that a three-decade bull market in bonds probably ended April 29.
Warren Buffett, the billionaire chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., told Bloomberg Television in May that he felt “sorry” for fixed-income investors with yields on corporate bonds so low.
The policy-setting Federal Open Market Committee refrained from reducing the pace of its monthly securities purchases on Sept. 18, with Bernanke saying the Fed must determine its policies based on “what’s needed for the economy,” even if it surprises markets.
The central bank will delay the first reduction in its bond purchases until March after a government shutdown this month slowed fourth-quarter growth, economists said. Policy makers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of 40 responses in a Bloomberg survey of economists.
The 16-day budget impasse in Washington reduced growth by 0.3 percentage point this quarter, economists said in the survey.
“It’s going to force the Federal Reserve to push off the tapering at the very least to March, but maybe as late as June,” Blackrock’s Fink said in an Oct. 16 interview on the CNBC television network.
Because the Fed may only have a “narrow window” to curtail stimulus as the economy struggles to recover, policy makers might consider whether to taper at all, Deutsche Bank AG strategist Jim Reid in London wrote in a research note dated yesterday.
The global economy is forecast to grow 2.85 percent next year, after a 2.01 percent expansion in 2013, according to economists surveyed by Bloomberg. In the U.S., growth is expected to reach 2.6 percent from 1.6 percent this year.
“We’re seeing a hard rally on the grounds the economy is growing well enough and the Fed’s taper strategy has been pushed further into the future,” Edward Marrinan, a macro credit strategist at RBS Securities, said in a telephone interview from Stamford, Connecticut. “All of that creates very appealing conditions for risk-takers to do their thing.”
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