Upbeat economic news late in July fueled investor worries that
the Federal Reserve would speed up its timetable for hiking
That sparked a late-month sell-off in taxable bond
, which overall lost 0.43% in July, according to preliminary
Lipper Inc. data.
Service-sector indicators were up. So were factory orders.
"With the approaching end of (the Federal Reserve's)
quantitative easing (program), people are edging out of rate
sensitive fixed income," said Stewart Taylor, a manager of $60.5
million Eaton Vance Short Duration Real Return .
Treasuries were the only category to gain, eking out a 0.03%
gain on average, as many
sought safety amid geopolitical havoc.
Incentives for taking risk were evaporating, Taylor said. "So
many investment grade corporates are fully priced. If there's no
hope for further price appreciation, you tend to take profits in
those names," he said.
The same retreat occurred lower on the credit quality ladder.
"The lower on the quality spectrum, the worse the return was,"
Taylor said. "And the absolute yield of riskier segments is very
low. So we started to see some profit-taking there too."
Preferring the safety of U.S. Treasuries, investors drove
emerging-market local currency debt funds to a 0.91% setback.
International income funds, as a group, lost 0.63%.
Relatively risky flexible income funds backtracked 0.57%.
Yield Curve Steepened
The yield curve steepened slightly as investors fled
intermediate and long bonds, driving up longer prices. More
investors edged away from the long and intermediate parts of the
curve. "Seven years and in have been better off," Taylor
The yield on two-year notes rose 6 basis points to 0.529%. The
yield on 7-year notes rose 11 basis points to 2.24%. The yield on
10-year notes rose 5 basis points to 2.58%.
Going forward, Taylor is increasing his cash reserves and
looking for opportunities in higher-quality corporates. He also
sees some values in shorter, higher-quality commercial
mortgage-backed securities (
For some retail clients in separate accounts, he is creating
bond ladders. Each rung has maturities of no more than five
years. "This is fairly new," he said. He is putting together
ladders with bonds rated BBB, yields of about 1.6% and a 2.9-year
Taylor owned a 3.60% coupon bond fromWestlake Chemical (
) that matures July 15, 2022, rated Baa3 by Moody's, with a July
total return of -0.10%, which was 26 basis points better than a
It benefited from its intermediate duration, relatively high
and uptrending industry cycle, Taylor said.
Tax exempt bond funds had another OK month.
Municipal bond funds overall edged up 0.11%. As in other
recent months, they were driven by steady demand and low
"In July we've had $23 billion in new issuance but north of
$30 billion in maturities and coupon payments," said Timothy
McGregor, describing monies that retail investors typically roll
over into other munis.
He expects more of the same in August. "We expect $33 billion
to $34 billion in reinvestment form coupons, calls and
maturities, but a supply of only $25 billion to $26 billion in
new issuance," he said.
But the seasonal surge of cash looking for bonds will dwindle
after August, he said. Issuance could pick up too. Muni pretax
yields have fallen to or below Treasury yields, making it more
economical for issuers to refinance old debt, McGregor said.
"Munis are still historically cheap vs. taxables, just not as
severely cheap as they were at the start of the year," he
McGregor owned a New York City water and sewer authority bond
with a 5% coupon, 2044 maturity, 2021 call feature, rated AA+ by
S&P. Its yield to call went to 3.65% from 3.80% in July.
"Pretax, that's still higher than taxables," he said. Its July
total return was 1.27% vs. 0.18% for the Barclays Muni Index.
There's also a good chance McGregor will be able to trade the
bond in a seller's market around year-end. New York is a state
whose bonds mature and pay coupons around year-end. That means a
lot of Empire State investors will be looking for ways to
reinvest their money in December and January.