Mutual Fund Quarterly
Investors were evidently calmed by Greece's mid-June election
and the later eurozone summit.
They abandoned their flight to safety, which had boosted
Treasury prices in April and more so in May. In June, Treasury
prices sank, leaving Treasury funds with a 0.88% loss on
average.
That left them ahead 4.91% for the second quarter.
Reflecting that, the yield curve flattened in Q2. The yield on
two-year notes was flat at 0.33% while it fell 59 basis points to
2.76% on 30-year bonds.
The S&P 500 edged up 3.96% in June but fell 3.29% in
Q2.
Taxable bond investors also took on risk in June.
Stocks bottomed in the first week of June.
"But then the S&P 500 rebounded," said Joe Balestrino,
whose Federated Investors funds include $7.4 billion Total Return
Bond . "In that environment, as you'd expect, lower quality bonds
outperformed high quality bonds. And, yes, this was exacerbated
by Greece and the summit."
Corporate A rated funds gained 0.22%, topped by BBB rated
funds' 0.56% and high-yield funds' 1.85%.
For Q2, that put them up 2.26%, 2.39% and 1.13%,
respectively.
Fading Fears
"Europe was more of a concern in May than June," Balestrino
said. "The Greek election and eurozone summit were actually steps
-- small ones -- in the right direction."
Balestrino is a manager of eight funds, including $1.4 billion
Strategic Income and $166 million Unconstrained Bond .
He added that U.S. economic data in late June
disappointed.
The U.S. gained 69,000 jobs in May. Many June forecasts see
100,000 new jobs for June. That's well below the 225,000 monthly
average in the first quarter.
The Labor Department will release jobs data on Friday.
Foreign income funds rose 1.29% last month and eked out a
0.08% gain in Q2.
Thanks to strong local fundamentals in most cases, emerging
market bond funds jumped 3.76% in June, but were still down 0.07%
for Q2 due to eurozone contagion.
Balestrino expects the U.S. economy to stay on its current
tack through the Nov. 6 election. "For one thing, corporate
hiring is being held back by uncertainty about (federal)
policies," he said.
Areas he likes are high-yield and emerging markets. Large
banks look especially tempting to him. "Yields look worthwhile,"
he said.
During Q2 he added to a Bank of America bond due May 13, 2021,
rated A- by S&P, with a 5% coupon.
Its price rose 276 basis points to 103.43, yielding 4.38%, for
a 3.95% Q2 total return. The comparable 10-year Treasury returned
5.95%.
The Treasury's yield fell 56 basis points during Q2 to
1.67%.
The Bank of America bond did best during Q2 in June. The
Treasury outperformed by doing well in June and better earlier in
Q2.
Tax exempt bond funds generally lost ground in June, but were
up for Q2. For example, general municipal debt funds lost 0.05%
last month as a group. They still gained 2.17% in Q2.
Muni funds faced several head winds. One was a bulge in
supply.
"There was a lot of issuance," said Alex Grant, manager of
$478 million RS Tax-Exempt and $264 million RS High Yield
Municipal Bond funds. "Many municipal budgets get affirmed in
June, and municipalities raise money."
In each of the past two weeks, there was about $8 billion in
new issuance. The week before that saw about $12 billion in new
supply.
"So munis will continue to get cheaper," Grant said.
Plus, June and July are big coupon payment months. Many
issuers try to recoup that money by issuing new debt. Planned new
issuance for the next 30 days -- known as the 30-day visible --
is also high.
Further out, August is traditionally a slow month for munis.
So Grant does not expect munis to pick up steam before Labor
Day.
No Bankruptcy Panic
A positive note concerned municipal bankruptcies. Stockton,
Calif.'s bankruptcy was a local problem but not one for the
broader muni market, Grant says. Retail investors who don't live
near Stockton are unlikely to have been holders.
Grant bought a 20-year bond issued by North Carolina for Duke
University's health system on June 12. Rated Aa2 by Moody's, it
has a 5% coupon.
Over the month its yield went from 84 basis points over the
MMD index's yield to 79 points over. That means the bond's dollar
price rose faster than the index's implied price. "So the bond
outperformed the MMD by 6 basis points," Grant said.