Chapter 9 – words that are going to be on a lot of lips for some time to come. Last week, Detroit filed for bankruptcy protection under Chapter 9 of the United States Bankruptcy Code, and the Motor City became the largest municipal bankruptcy in history – definitely a dubious distinction. The financial press has focused most attention on the immediate impact to investors in Detroit’s debt, but in our opinion, there will be effects felt by municipal bond investors more broadly, as well as by Detroit’s citizens and workers.
A good deal of ink was spilled last week about how some municipal bond market participants were “concerned” about how some of the city’s general-obligation bonds (those are municipal bonds backed by the full faith and credit of a municipality) were classified as “unsecured” by the Detroit’s emergency manager. Read more
You may have noticed over the past several weeks that in addition to the great economic insights posts here on the Institutional Investor section of The Principal Blog, there have been some guest contributors. Several investment professionals from Principal Global Fixed Income have been writing posts that delve into their areas of expertise. You’ve seen posts on managing volatility and tail risk from Derek White, the head of risk management. You’ve read about bank loan strategies from Mark Cernicky, product specialist. You’ve learned about yields on Japanese government bonds from our global strategist, Seema Shah. And you’ve read about 10 concrete concepts to researching high yield from Phelps Hoyt, our head of high yield research.
I’m delighted to announce that because of the positive response we’ve received on the fixed income blog posts, we’ll be expanding our Institutional Investor section to include regular posts from the fixed income team! Read more
There’s a lot of money flowing into bank loans. As of May 17th, bank loan funds have had 48 consecutive weeks of inflows; year-to-date inflows have totaled a record US$24 billion. Compare that with year-to-date inflows of US$2.6 billion for high yield bonds. In fact, over the past 16 weeks, bank loan funds have averaged over US$800 million per week, and six of those weeks have represented the highest flows ever. A recent Wall Street Journal article covered the topic (paywall). Bank loans are a high yield asset class, which draws a natural comparison to high yield bonds. Consider this – despite the overwhelming positive demand for bank loans, year to date, high yield bonds have outperformed bank loans by over 2% (5.51% for the JP Morgan US High Yield Index vs. 3.26% JP Morgan Leveraged Loan Index). To me, this represents both caution and opportunity. Don’t assume that bank loans, as an asset class will outperform high yield bonds. That said, bank loans can still be a positive contributor if you understand what makes the asset class unique and if you understand what makes one issuer better than another. Read more
What’s one of the most noticeable consequences of the Fed’s third round of quantitative easing (i.e. QE3)? It’s the stark drop in fixed income volatility. Look at the chart below, which demonstrates this point for the investment grade credit market. The blue line is the rolling 21-day realized total-return volatility for a Barclays Global Investment Grade Credit Index. The red line is Thursday, September 13, 2012 – the day the Fed announced QE3. As the blue line crosses the red one, you can see marked drops in the level and range of volatility.