Investors pumped up riskier categories of taxable bonds in
They did it amid signals that investors should prepare
themselves to be weaned from central bank support, said Rick
Rieder, chief investment officer of fundamental fixed income
portfolios for asset-manager giant BlackRock.
High-yield funds led the way for taxables, gaining 1.32% in
January, according to preliminary Lipper Inc. data.
Flexible-income funds jumped 1.27%. Emerging-market debt funds
were about flat with a -0.1% decline.
Reductions in stimulus steps by global central banks would
remove a key prop from the markets. But the fact that central
banks feel they can move in that direction is a key show of
confidence in economic growth, Rieder said.
One sign was late January's $137 billion repayment by European
banks to the European Central Bank. It was a key step toward
normalization of eurozone liquidity, Rieder said. And it meant a
reduction in the ECB's balance sheet.
Another sign was in recent Federal Open Market Committee
minutes. About half of the participants said the Fed should
complete asset purchases around mid-2013.
A third sign was Federal Reserve Chairman Ben Bernanke's
December FOMC press conference remarks, in which he noted the
potential risks in letting the Federal Reserve balance sheet get
too large due to quantitative easing.
Rieder -- who also is a manager of $4 billion BlackRock
Strategic Income Opportunities Fund -- expects the market to
continue to tilt to higher-risk products.
He's trimmed long-dated Treasuries and taking profits in
sovereigns in places like Italy. "The spread between them and
German bunds compressed about 250 basis points the past six
months," Rieder said.
During the month, he owned an Italy bond with a 5.25% coupon,
rated Baa2 by Moody's, maturing Aug. 1, 2017. Its yield fell 20
basis points to 2.98%, as its dollar price rose 0.70 to 109.56,
for a 1.12% total return. "That was a big move, so taking profit
made sense," he said.
Also, he's adding to U.S. bonds that get a tail wind from real
estate's rebound, such as commercial mortgage and nonagency
Tax-exempt funds on average gained 0.52% last month. They were
driven by strong inflow against typical seasonally weak new
issuance, said Dan Loughran, head of OppenheimerFunds Rochester
Also, we have a new 39.6% top federal tax bracket. In
addition, there's a new 3.8% tax on investment income or certain
high modified adjusted gross incomes.
For the rest of Q1, Loughran expects demand to continue to top
supply even with the usual late-quarter increase in issuance.
But he warns that the four-year muni run is due to pause.
"Investors should be satisfied to earn just their coupons," he
Market risk appetite last month was illustrated by a Puerto
Rico aqueduct and sewer bond he owned, with a 5% coupon, maturing
July 1, 2033, rated BBB by Fitch. Its price last month rose to
98.42, yielding 5.13%, from 90.75, yielding 5.82% for a total
return of 8.86%.
It sold off in December when Moody's lowered its rating two
rungs to Ba1. "In January investors who were willing to take on
risk got in, driving up its price," he said.