Treasuries, Risk Products With Yield Ruled In April


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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 Treasuries.

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 Inc. data.

Risk-on investors drove emerging markets debt funds up 2.08% , triple-B corporate debt funds up 1.77% and high-yield funds up 1.72%.

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 ( AAPL ) 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 ( BAC ) 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," he said.

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%.

Municipal Moves

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 78.

"While the market was suffering from redemptions, the dealer priced this bond rather cheap to move it out the door," Grant said.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds
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