The party carried over into October. The taxable bond fund rally that started in September did not slow in October as general taxable bond funds advanced 1.47% on average, according to preliminary Lipper Inc. data.
Treasury funds tacked on 0.84% for the month. But taxables' leaders were spread products. The more risky the category, the better it did, spurred by investor faith that the Federal Reserve was not tapering its easy money policies right away.
Emerging markets hard currency debt funds jumped 2.48%.
High-yield funds climbed 2.23%. Corporate BBB-rated funds gained 1.57%.
The yield curve was nearly unchanged. The yield on two-year notes fell 2 basis points to 0.31%. The yield on 10-year notes was nearly flat at 2.65%.
The Fed delayed the start of tapering amid the government brawl over a partial shutdown and extending the debt ceiling. Stewart Taylor, a manager of $66 million Eaton Vance Short Term Real Return , said, "The Fed will be reluctant to start tapering until they're sure the fiscal side of things is not going to push back on the economy more than it already has. I think it will be at least March before the Fed announces tapering ."
Another driver of spread products was a perception that the global economy is improving. "It's improving enough not to damage corporate fundamentals, but not enough for the Fed to end quant easing," Taylor said.
Going forward, Taylor is bullish about credit risk in general. "But rate risk makes us very uncomfortable," he said. "Once rates start to rise, it will be precipitous."
To cope, Taylor is boosting his overweight in financials. He is also trimming Treasuries, and he is neutral on mortgage products.
"We continue to move down the credit spectrum, so we have a larger triple-B position than in some time," he said.
One example was the investment bank Jefferies Group bond he bought in January when the company was out of favor on Wall Street. A takeover by Leucadia National gave Jefferies capital and resources to go after opportunities.
The bond, with a coupon of 5.125% and a maturity of January 2023, was rated Baa3 by Moody's. Its price rose in October to 101.80 from 100.20, for a total return of 1.60% vs. 0.56% on the Feb. 15, 2023 Treasury.
Tax-exempt funds also rallied, but not as much as they had in September. The partial government shutdown spooked muni investors, said Jennifer Tabak, lead manager of $391 million JPMorgan Municipal Income .
Resumption of government operations and thin supply in munis' forward calendar cheered investors late last month.
So did efforts by Puerto Rico to explain its plans for meeting its bond debts, Tabak said.
Stronger Economy Helps
General economic growth and stronger revenue collections offset worries about individual problems such as Detroit and Chicago.
Investors were reluctant to tie up their money for long. Tabak held a five-year District of Columbia income tax bond whose October total return was 1.72%. A 10-year Columbus, Ohio, sewer revenue bond with the same 5% coupon and Aa1 Moody's rating returned 0.76%.
Tabak is cautiously bullish going forward. She expects overall supply to be lower this year than last. The sell-off in munis has made many attractively valued. Munis' main problem now is that many investors are shifting assets into equities, she said.