Bond investors are still jumpy about Federal Reserve tapering
and the prospect of interest rate hikes.
Last May and June, they took out their jitters on Treasury
bonds and funds.
In January, funds with credit risk got hit as investors fled
to bonds with greater perceived safety.
Emerging markets' local currency funds plunged 4.37% on
average, based on preliminary Lipper Inc. data. Emerging markets'
hard currency funds slid 1.58%.
In contrast, Treasury funds soared 3.29%. Corporate bond funds
rated A gained 1.89%. GNMA funds rose 1.72%.
"The problem is this whole story surrounding emerging
markets," said Matthew Pallai, co-manager of $1.7 billion
JPMorgan Multi-Sector Income Fund . "Investors think risk may be
Emerging market angst is fueled by concern over China. As GDP
growth slows, investor anxiety is mounting about liquidity and
solvency crunches hurting the Middle Kingdom's shadow banking
system -- basically a replay of the U.S. financial crisis.
And investors are wondering whether emerging markets will be
able to buy as much from developed markets.
"That's weighing on developed markets' equities and high
yield," Pallai said.
High-yield bonds gained a relatively modest 0.51% last month.
High yield's 6.82% gain in 2013 led all taxable bond-fund
As the Fed extended its bond-buy tapering on Jan. 29,
investors flocked into short-term bonds and funds. Prices rose
faster on the short end of the yield curve, flattening the curve
The yield on two-year notes fell 39 basis points to 3.40%. The
yield on 10-year notes fell 37 points to 2.67%.
Pallai likes credit over duration risk in part because he
expects U.S. GDP growth to continue.
"We still like high yield, credit in Europe, financials in
Europe, especially down in the capital structure, and some
securitized debt like CMBSs (collateralized mortgage-backed
securities)," he said. "Even though they've tightened (meaning
that their prices have declined relative to Treasuries), we still
like nonagency mortgages too."
The pullback in emerging markets is close to making valuations
attractive enough to start buying, he adds.
Pallai held a
Royal Bank of
) 6% coupon bond, maturing Dec. 19, 2023, rated BB+ by S&P to
take advantage of strengthening fundamentals among European
financials and for its yield, which fell 5 basis points to 5.85%
last month, for a total return of 0.86%.
Tax-exempt funds had a strong January, rising overall 1.87%.
Investors sought refuge in them as they fled sectors such as
emerging markets. Also, supply was thin while demand spiked as
investors looked to reinvest quarterly coupons.
Lyle Fitterer, lead manager of $2.7 billion Wells Fargo
Advantage Muni Bond , says new supply projections for all of 2014
"If supply picks up, munis will perform more in line with
(Treasury) rates," he said.
Detroit's bankruptcy and Puerto Rico's woes have not infected
the rest of the bond market much, he adds.
Fitterer likes munis' outlook. "It's still one of the cheapest
segments out there, especially in view of taxes going up," he
He owned a Chicago general obligation bond with a 5% coupon,
maturing in 2034. Its price rose to 100.04 from 94.79 last month,
for a 5.95% January return. "That illustrated the demand for
income in the muni market," he said. It also showed investor
approval of Illinois' new pension change.