Taxable bond investors didn't go gaga. But they were generally
heartened by signals from the Federal Reserve in August.
On Aug. 22, the Fed released its minutes, showing that the
central bank is leaning toward additional moves to boost the
economy if it fails to show stronger growth.
That message was reinforced on Aug. 31, in remarks at the
Jackson Hole, Wyo., economic summit. Fed Chairman Ben Bernanke
said the central bank plans strong steps if needed to amp up the
nation's sluggish recovery.
Stocks and bonds rallied, though modestly, on both occasions.
After initially pulling back on Aug. 31, 10- and 30-year
"People were persuaded that the Fed is going to take more
active measures (to stimulate the economy)," said JPMorgan's
Matthew Pallai, co-manager of JPMorgan Multi-Sector Income .
The curve steepened a bit as the yield on two-year notes
slipped 1 basis point to 0.219%, while the yield on 30-year
Treasuries climbed 12 basis points to 2.68%.
European policymakers also did enough in August to persuade
investors that they're working on a solution to eurozone debt
Encouraged, investors pushed up most taxables in the month.
Riskier categories led the way. Flexible income bond funds scored
a 1.26% gain on average, according to preliminary Lipper data.
High-yield bond funds advanced 1.19%. Emerging-market debt funds
climbed 1.11%. Treasury funds lost 0.34%.
A subprime subordinated, unsecured bond owned by Pallai showed
the payback for even modest risk. The bond was rated AA+ by
S&P. But this Asset Backed Securities Corp. Home Equity Loan
Trust bond is a nonagency mortgage securitization, which is not
Its price rose nine points to 98.59 in August, pushing its
yield down 2 basis points to 3.86%, for a total return of 0.26%
vs. a 0.18% loss for the Barclays Aggregate index.
Going forward, investors expect bad news from Europe. "But as
long as it's nothing horrible, there is a lot of cash on the
sidelines, waiting to be put to work in a pullback," Pallai
He said he is cautiously bullish on riskier assets such as
corporate bonds, high yields and mortgage backed securities
whether agency backed or not.
In tax-exempt funds, low rates drove many investors down the
credit curve for yield, said Peter Hayes, head of BlackRock's
municipal bond fund team. Hospital and transportation bonds take
more due diligence than state bonds with lower credit risk, he
He found that sort of value in a Miami-Dade County transit
sales tax bond with a 5% coupon, due in 2042, rated A1 by
Moody's. Its price rose 36 points to 112.56, with the yield
falling 5 basis points to 3.48% for a total return of 0.68% vs.
the Barclays Muni index's 0.11%.
High-yield muni funds notched a 0.55% gain in August.
The paucity of yield also drove many income investors to the
higher yield of mutual funds. Many funds hold bonds they bought
when rates were higher.
Strong bond demand should blunt the historically weak-price
period that starts in late September and goes into October, Hayes
said. Still, he expects rising issuance this month and next.
"That could lead to a bit of a correction," he said.