Two contrary factions dominated taxable bonds in April.
The skittish investors, made jittery by weak GDP growth data
out of both Washington and Beijing, fled for safety into
At the same time, yield-hungry investors willing to take on
some risk gobbled up higher-yield debt in the form of junk bonds,
emerging markets debt and triple-B corporate debt.
So it was a month in which risk-off investors push Treasury
funds to a 1.90% gain on average, according to preliminary Lipper
Risk-on investors drove emerging markets debt funds up 2.08% ,
triple-B corporate debt funds up 1.77% and high-yield funds up
It didn't take many nervous investors to drive up Treasuries.
"Treasuries went up on short supply because the Treasury takes
them all," said Mark Egan, lead manager of $293 million Scout
Unconstrained Bond Fund .
And the Federal Reserve Bank's near-zero policy on short-term
interest rates forced investors, yet again, into higher-risk
securities to seek yield. "It keeps driving people out on the
yield curve," Egan said.
The yield curve flattened slightly in April as the yield on
two-year Treasury notes fell 3 basis points to 0.22% while the
yield on 10-year Treasuries fell 17 basis points to 1.70%.
How eager are investors for yield?Apple (
) launched the sale of $17 billion of bonds on April 30, the
largest corporate bond sale ever. Orders topped $50 billion.
Apple's issue included $5.5 billion for 10 years at 2.4%. The
stock's dividend yield was 2.8% as of April 30.
"So you have greater yield on the stock than those bonds,"
said Joe Milano, manager of $4 billion T. Rowe Price New America
Growth . "Although you take more risk (in the form of potential
price declines) in the equity."
One of Egan's holdings showed a similar appeal. He owned a
three-yearBank of America (
) bond with a 1.5% coupon, rated Baa2 by Moody's. Its yield
barely moved, easing to 1.28% from 1.3% in April as its price
inched up to 100.52 from 100.5.
"The point is that this provides stable price, stable yield,"
As for his outlook for taxables overall going forward, Egan
expects a similar dynamic to prevail for the rest of this year.
To position for his big concern -- plunging prices when the Fed
eventually raises rates -- he is rotating into shorter durations,
such as two to three years, and floating-rate securities.
He is adding to weightings in high-yield and single-A to
triple-B rated corporate debt.
He continues to avoid emerging markets because he sees
insufficient return for the incremental risk.
He is standing pat on agency mortgage-backed securities,
mostly floating rate. He sees them as richly priced and
vulnerable to price declines when the government stops buying, he
said. GNMA funds rose 0.58%.
Tax-exempt bond funds gained. General muni funds averaged
1.12% despite net estimated outflow.
Headline risk also forced issuers to price cautiously to
attract buyers. Alex Grant, manager of RS' $472 million Tax
Exempt and $241 High Income Municipal funds, bought a California
general obligation bond on April 11 at 111.43, yielding 3.62%. By
month-end it was 113.72, yielding 3.36%. Its spread over the MMD
triple-A index contracted very little, to 62 basis points from
"While the market was suffering from redemptions, the dealer
priced this bond rather cheap to move it out the door," Grant
Outflow is normal in April as investors raise cash to pay
taxes. Investors were also edgy because the president's budget
renewed questions about whether municipal bonds would remain
totally tax-free, Grant said.
Still, inflow should pick up in June and July as investors
reinvest bond coupon payments. Appetites could also be whetted by
the unveiling of state budgets.