If You’re Investing in Bonds, Bill Gross Has a Message For You
Source: http://feeds.moneymorning.com/~r/moneymorning/jOLe/~3/F58-pG5tUzc/Posted on Thursday, February 7th, 2013 | In Uncategorized
If you're investing in bonds, Bill Gross just delivered you a serious warning.
Gross wrote in his February newsletter that the factors that contributed to last month's 1% loss for U.S. Treasuries - the biggest since March 2012 - aren't going away any time soon.
Total debt, which includes corporate, government and household, has expanded from $3 trillion in the 1970s to about $56 trillion today, explained Gross. He said that's left bond yields in the 1% - 2% range, instead of the historic level of 3% - 4%.
Gross said the staggering amount of debt in the United States has created a "credit supernova" that could crush the bond market as the global credit bubble "is running out of energy and time."
"Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic," Gross wrote.
Gross warned that anyone investing in U.S. government bonds should evaluate their exposure.
And he isn't alone. Jim Rogers and Goldman Sachs have both been bearish on bonds.
"I'm short long-term government bonds," Rogers said Feb. 6 on Bloomberg Radio. "I plan to short more. That bull market, that's a bubble."
So what should bond investors who want yield do with their money?
Investing in Bonds: Go Global
Investors who want yield without high risk in the bond market should consider emerging market corporate bonds.
Some U.S. investors have avoided emerging markets corporate debt, thinking the market is small and illiquid.
But as Gross' bond firm PIMCO has pointed out, that's not the case.
"The dollar-denominated EM corporate market has been growing steadily, and many corporates can offer higher yields and lower durations than sovereigns," the bond house said in a research note in 2012. In fact, "the stock of EM corporate bonds outstanding has grown to around $1 trillion, dwarfing that of EM sovereigns at $680 billion," according to PIMCO.
Emerging markets firms have issued an average of $200 billion per year in corporate debt since 2010. For those that need a little more reassurance, consider the following:
"Since 2003, EM U.S. dollar-denominated corporate bond issuance has outpaced sovereign issuance in a trend we believe will make EM corporate debt an increasingly larger allocation to emerging market fixed income," exchange-traded fund (ETF) issuer WisdomTree said.
Also, emerging markets corporate debt can jump in value in stunning fashion. For example, PIMCO points out that $1 invested in Russian corporate debt in 2008 would be worth more than $2 today.
How to Invest in Foreign Corporate Bonds
Until recently, accessing emerging markets corporate bonds was difficult for individual investors.
Fortunately, ETF issuers, ever the purveyors of niche products, changed that with a spate of new product launches devoted exclusively to corporate debt issued by companies in the developing world.
WisdomTree is the sponsor of the WisdomTree Emerging Markets Corporate Bond Fund (Nasdaq: EMCB), the first ETF to track corporate debt from developing nations.
EMCB debuted in March and by the end of 2012 had $87 million in assets under management, making it one of the more successful new ETF launches of 2012.
If you want more information to validate the emerging markets corporate bond investment thesis at large, then consider this: the concept behind EMCB proved so successful right off the bat that not one, but two copycat ETFs have since come to market.
EMCB offers a 30-day SEC yield of 3.74% and an embedded income yield of 4.42%. And its credit risk is fairly low. Roughly 73% of the fund's holdings carry investment grade ratings. Of the remainder, only a scant 2.4% are rated below B and plenty are knocking on the door of investment-grade ratings.
EMCB's holdings are also dollar-denominated, meaning investors will not be exposed to wild swings in emerging markets currencies.
What makes the fund all the more alluring is its management style. Not only do the portfolio managers consider macroeconomic factors, company-specific credit factors are also considered.
Of course, capital appreciation cannot be ignored. Since inception, EMCB has returned nearly 9.2%. Obviously, that performance has been driven by the returns of its holdings.
>>Get Money Morning Global Investing Strategist Martin Hutchinson's full 2013 bond market analysis, complete with even more profit plays in bonds.
>>You'll also like Three Top-Notch Choices for Yield-Starved Investors.
Recommended for You:
- Money Morning:
Are Junk Bonds About to Become a Victim of Their Own Popularity? - Nightly Business Report:
Credit "Supernova" Leads to Further Inflation
About Money Morning (http://moneymorning.com)
Money Moves the Markets; Money Morning Lets You Move First We’re in the midst of the greatest investing boom in almost 60 years. And rest assured - this boom is not about to end anytime soon. You see, the “flattening of the world” continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially ; and a technological revolution even in the most distant markets on the planet. The bottom line is this: With U.S. influence slipping, and the dollar declining as well, investors who think too narrowly about this transformation will face years of meager returns. But those who embrace this new global reality can make themselves very wealthy. # Over the next 25 years, America’s share of the worldwide economic pie will slip from 28% to 24%… # Even as Asia’s share almost doubles ;which means it will account for a whopping 55% of the global economy by 2030. The big brokerage firms are making a killing on the global boom. Yet Wall Street reserves the timeliest information - and the best profit opportunities - for its partners or wealthiest clients. And the Securities and Exchange Commission doesn’t help the everyday investor much either. The second sad fact is this: While you can buy any U.S. or Canadian stock you want, the SEC prohibits you from purchasing many of the available international stocks. The reason: Foreign companies that haven’t registered with the SEC are off-limits to most U.S. individual investors. Our worldwide research staff includes former investment bankers, international financiers, emerging markets specialists and veteran financial journalists. Our experts know that certain capital flows essentially act as a “leading indicator” of future profit opportunities. These are opportunities that you won’t be reading or hearing about anywhere else. Each weekday morning, in a readable style you can digest in just a few minutes, you will reap the benefits of our research and expert experiences. Indeed, Money Morning will bring you: # The latest reports on China, Japan, Emerging Europe, and the other global hot spots where most investor wealth will be created in the months and years to come… # Reports on companies you’ve likely never heard of - even though they’re poised to sell billions worth of their wares to “new middle class” customers around the world… # Information on the U.S. companies shrewd enough to cash in on this boom in global; # The latest developments in banking, interest rates, foreign investment and other global investing topics; # Advice on how to invest in currencies, precious metals, commodities and energy # Inside news on the hottest investments, including water, uranium and private equity… # And news on rules and regulations, financial trends and strategies - and any other “market intelligence” that you will need to become a shrewd-and-successful investor in the greatest global investing boom most of us will ever see. Money does move markets. But Money Morning lets you move first. |
No recommendations, either expressed or implied, are being made to buy, sell, hold or short any of the mentioned stocks. No legal, tax or accounting advice is expressed or implied. Always contact your attorney, CPA, or tax advisor before acting on any legal or tax issues. StraightStocks.com is not responsible for the content, products, or services of any of the advertisers on this site. StraightStocks.com receives compensation from advertisers on this blog. Services and products referred to herein are trademarks, registered trademarks, servicemarks, and/or registered servicemarks of their respective trademark or servicemark owners.