Amid investor expectations that the Federal Reserve is getting
closer to tapering its bond buys, taxable bond fund performance
in November hinged on interest-rate sensitivity.
The more sensitive a category was, the worse it performed.
Treasury funds were among the worst laggards, losing 1.13% on
average last month, according to Lipper Inc. preliminary
Worst in performance were emerging markets local currency
funds, losing 3.25%. Next were emerging markets hard currency
funds, down 2.05%. Corporate BBB-rated funds lost 0.34%.
Flexible income funds, up 0.42%, led the few categories that
gained ground, especially among intermediate and long-dated
funds. High-yield funds, which get most of their yield from
credit risk rather than rate risk, were down 0.36% .
"The primary driver has been the prospect of Fed tapering,"
said Rick Rieder, manager of $10.4 billion BlackRock Strategic
Income Opportunities . "The most recent government payroll
report, which showed surprising strength, also pushed people to
bring forward their expectation that tapering would start in
December or January, or March at the latest."
Investors, especially retail investors, continued their
efforts to protect themselves from rising rates. Redemptions were
generally heaviest in funds holding long-dated bonds, said
Rieder, who is also chief investment officer of BlackRock.
Emerging markets funds were hard hit because tapering is
expected to help strengthen the U.S. dollar, which will mean less
U.S. consumption of emerging markets commodities. Also, tapering
will be a sign of stronger U.S. GDP growth.
Rieder expects the start of Fed tapering in December. "The
markets will overreact even though reducing ($85 billion per
month in bond) purchases by $10 billion a month is not that much
and is already priced in now," he said.
Before investors began to worry about tapering, the yield on
10-year Treasuries got as low as 1.66% in April. Now it is around
2.80%. That's not far from an area a little higher than 3.00%,
where it would be without Fed stimulus, he said.
After an initial overreaction, Rieder does not expect the
market reaction to be as bad as last spring's.
He likes commercial mortgage-backed securities (
), high yield, peripheral European debt, and debt from the
Philippines, Malaysia and parts of China. He also likes some
long-dated tax-exempt bonds issued by transportation authorities,
universities and health care facilities as well as some state
general obligation bonds.
He owned a Hilton USA Trust bond that showed why he liked
CMBS. Rated BB by S&P -- below investment grade -- it was
secured by a lot of Hilton's U.S. real estate. And it matures in
just five years. Its short maturity gives it low interest-rate
sensitivity, Rieder said. And its yield is 5.32%.
Tax-exempt funds were weak in November, losing 0.27% on
Investor fear of Fed tapering was the main culprit, said
Philip Condon, head of U.S. fixed income and muni bonds for
Deutsche Asset & Wealth Management.
Condon sees a continuation through December, fueled by
tax-loss swapping as investors offset taxable gains elsewhere in
their portfolios. But he expects the muni market to firm in
January in part due to investors reinvesting quarterly coupon
He likes the 10- to 30-year segment of the yield curve. That
segment was hurt the most recently, so prices there have become
the most attractive.
He held a New Jersey turnpike bond with a 5% coupon, maturing
Jan. 1, 2035, with a par call on Jan. 1, 2022. Rated A+ by
S&P, the bonds are secured by toll revenue.
Its November total return was 0.26%, with its yield rising 2
basis points. Its yield backed up less than increases of 6 basis
points by the MMD AAA muni index, 20 basis points for the 10-year
Treasury 20 and 18 basis points for the 30-year Treasury.