Fear of eurozone debt and China's slowing growth toggled on
again in July, sending investors back into safe-haven U.S.
Treasuries and corporate debt.
"Money fleeing Europe and Asia ended up in those taxables,"
said Stewart Taylor, a manager of $86 million Eaton Vance Short
Term Real Return Fund .
The stampede to safety drove the yield on the 10-year Treasury
to 1.41% on July 24, its lowest in at least 30 years, Barclays
said . The 30-year T-bond's 2.47% yield on July 25 was also a
record low.
Treasury funds tacked on 1.63% on average for the month,
according to preliminary Lipper Inc. data. They fell 0.88% in
June.
Investor fears eased again late in July, when the leaders of
France and Germany backed a European Central Bank vow to protect
the euro. The pledge to buy beleaguered nations' bonds sparked a
rally for stocks and riskier bonds.
That easing of investor jitters made the yield curve steepen
slightly at month end. As the flight to safety slowed, long
Treasury prices dipped and their yield rose.
Riskier taxables were fueled by investors who were more
concerned with income than safety. They took on risk outside the
eurozone and Asia to obtain yield, Taylor said.
Emerging markets bond funds soared an average of 3.15%,
leading all taxables. The rising dollar created a slight drag for
local-currency emerging markets debt funds, said Nic Pifer, head
of global bonds at Columbia Management.
Triple-B-rated corporate funds rose 2.36%. Even A-rated
corporate funds gained 1.89%.
Shopped For Macy's
Taylor had aMacy's (
M
) bond, rated BBB by S&P, with a 5.9% coupon and due December
2016.
Its price rose 1.51 points in July to 116.78 for a total
return of 1.7% vs. 0.8% for the five-year Treasury.
"That showed how BBB corporates outperformed," Taylor said.
Meanwhile, he said, with a five-year duration, he avoids taking a
lot of interest-rate risk.
Taylor said taxables will be limited until the eurozone cleans
up its mess. For now, he likes corporates. Many firms have strong
balance sheets, excess cash and are still expanding productivity
gains at attractive valuations, he added.
The sweet spot is corporate-rated BBB and A, mainly
industrials, he says. He also likes high-quality, shorter
commercial mortgage-backed securities as well as residential
mortgage-backed securities.
Income-hungry investors also drove tax-exempt bond funds
higher in July. General muni debt funds averaged a 1.86%
gain.
"Many tax exempts are trading at higher yields than
Treasuries, which is atypical," said Konstantine Mallas, manager
of five T. Rowe Price funds, including $2.9 billion Tax Free
Income .
They're doing that despite stronger-than-expected new supply,
he said. Nor were investors fazed by bankruptcies, which have
actually declined since last year, said Municipal Market
Advisors.
Mallas sees continued strong inflow and low issuance buoying
munis until the fall. Then he sees a seasonal pickup in issuance.
He also sees demand topping supply as some buyers return from
vacations and other buyers turn to munis for yield they can't get
from Treasuries.
He owned a New York state thruway authority bond with a 5%
coupon, A1 Moody's rating, 10-year call and 2042 maturity. Its
price rose 4.21 points in July to 112.71 for a 4.14% return vs.
1.59% for the Barclays Muni Bond Index.
The bond provided long-bond performance but intermediate
duration due to its call, plus revenue backing and low credit
risk, he said.