by Lightspeed.com

The Week Ahead: Bond prices began a move higher after yields reached seven month highs on concerns over the euro zone debt markets. Leaders of the European Union came to an agreement on an outline of a new fund to fight a future crisis. After a couple of weekly retail sales reports via the Redbook and ICSC Index on Tuesday, Wednesday will bring an important final GDP report for Q3. Existing Home Sales and the FHFA House Price Index will also be released. Thursday ends a holiday shortened week with four economic reports starting with Durable Goods then Personal Income and Spending followed by Consumer Sentiment and New Home Sales.

Stocks to Watch: Traders or investors interested in rising bond prices may want to look at the iShares Barclays 20 Year Treasury Bond Fund (TLT) which rose 1.8% on Friday. The U.S. Dollar reasserted its uptrend after a two week consolidation as the PowerShares US Dollar Index Bullish Fund (UUP) pushed higher again. Despite many overbought stocks in the NASDAQ, a few lower priced issues still sport decent technical patterns. They include Sonic Corp. (SONC), Fuelcell Energy (FCEL), Drugstore.com (DSCM), and Aeterna Zentaris (AEZS).

Special Note: The positive seasonal bias surrounding the Christmas holiday may keep stocks elevated to year end, but investors may want to keep note of the fragile technical conditions underneath the major indexes as 2011 nears. Additional measures supporting a pending correction would include a Volatility Index (VIX) near its April low and mid 2007 level. Another is the number of new 52 week highs since April on the NYSE has gone from a peak of 1751 in April to 1685 in November to 1252 on December 7 and just 611 on December 14 despite higher highs in the major indexes over the same timeframe indicating momentum on the wane.

by Anna Prior

PROPONENTS OF so-called active exchange-traded funds say the products—where a manager, not an index, decides what securities to buy and sell—could revolutionize investing. But, at least so far, that revolution has barely started.
Several prominent mutual fund firms told government regulators during the past year that they were getting into the active-ETF business, but the firms—which include Legg Mason, T. Rowe Price and Eaton Vance—still haven’t launched the new products. Indeed, even some of the asset managers themselves appear to be questioning whether they really want to jump into active ETFs. In March, Eaton Vance, which operates 92 mutual funds, filed plans to launch five actively managed bond ETFs. Now the company is reevaluating the “business opportunity in the active-ETF space,” says Robyn Tice, an Eaton Vance spokesperson. Legg Mason and T. Rowe also confirm they were evaluating their ETF options.

It’s making some experts question when actively managed ETFs will take off, if ever. There are only 20 active ETFs on the market now, with about $900 million invested in them—a drop in the bucket compared with the more than $850 billion in almost 1,000 ordinary ETFs. The delayed revolution, however, might not be a bad thing for investors, some pros say. Other investment products, such as target-date mutual funds, came out in droves right away, and investors threw money into them without really knowing how well they would perform in a bad market (as it turned out, in the case of target-date funds, not very well). “As we’ve seen in the last couple of years, the capital markets revealed some flaws at unfortunate times. It’s definitely worth a delay to uncover these issues now,” says Jeff Tjornehoj, a senior research analyst at mutual fund–research firm Lipper.

by Reshma Kapadia

Few people ever want to be stuck in the middle. But in the bond world, that may be the perfect place to be, even if the secret of this strategy is already out.

So-called intermediate-term bonds, which mature in more than a few years but in less than 10 years, have been hot for over a year now. Indeed, funds that include the Jan Brady of bonds have attracted more than $100 billion in new money since the beginning of 2009, more than any other type of bond fund.
And it’s easy to see why: The bonds typically have higher yields than short-term bonds, and some analysts say their prices won’t fall as dramatically as those of long-term bonds if the Federal Reserve raises interest rates to head off inflation. What’s more, some longtime bond investors are turning their attention to intermediate bonds issued by companies whose finances aren’t the best. Their ratings of B or BB are just below investment grade, but the yields are certainly eye-popping: as high as 9.25 percent.
That, of course, comes with some risk. The high-yield bond market has taken a beating recently as many investors, spooked by the credit problems in Europe, have run away from any investment they consider risky. But an improving economy can shore up an issuing firm’s balance sheet, reducing default risk and pushing bond prices higher, says Kathleen Gaffney, comanager of the top-performing Loomis Sayles Bond fund. They can be the “crème de la crud,” says Zane Brown, fixed-income strategist for Lord Abbett, which manages $94 billion for clients.

To be sure, analysts say investors who need money fast should probably stay away from all intermediate bonds. Prices can swing dramatically; junk bond prices, as a group, fell more than 4 percent in May alone. And anyone expecting a repeat of the big gains bonds had in 2009 will likely be disappointed. Companies and governments also have billions in debt coming due in the next couple of years, and any difficulty in refinancing it or economic stumbles could send prices of bonds and bond funds tumbling.
But if the U.S. economy continues to recover, three- to seven-year bonds of slightly lower credit quality could be a decent place to invest for a while. “With a slower recovery, you might as well pick up some returns in the meantime,” says Anne Briglia, senior fixed-income strategist at UBS Wealth Management.

The Middle of the Bond Road

Dodge & Cox Income (DODIX)
The fund has a contrarian streak, owning fewer Treasury bonds and more corporate bonds than its peers, with an average duration of about four years. The fund’s five-year average return beat 85 percent of peers.

MFS Bond (MFBFX)
Almost half of this fund’s portfolio is in BBB bonds, and a quarter of its holdings are higher-quality high-yield bonds. One downside: a 4.75 percent sales charge if you buy the fund directly from the company.

FX Signals by MDM Partners

by Richard Lehmann

Investors moved $69 billion into municipal bond funds last year. Don’t follow the lemmings into these future default traps.

The municipal bond landscape has changed substantially since the financial crisis, and not for the better. The problems began in late 2007 with the downgrading of the bond insurers. These firms-Ambac ( ABK ), MBIA and others-collected insurance premiums from smaller issuers of tax-exempt bonds to guarantee the bonds against default. This insurance made the bonds more salable by giving them a ratings upgrade to AAA.

The system worked beautifully until the insurers veered off into the business of guaranteeing exotic credit derivatives on mortgages and other debt. Losses there impaired the insurers’ balance sheets, so the debt they insured lost its automatic AAA rating. Thus, a muni market dominated by interchangeable AAA credits became a bazaar where you now have to know a lot more about the obscure sewer authority or airline that is borrowing the money.

In the past year the muni market has seen a strong rebound. Helping out: the realization among savers that the new Big Government politicians are going to jack up income taxes. That makes U.S. Treasury bonds relatively less attractive. Last year saw $69 billion of net inflows into tax-exempt bond funds.

Don’t follow the lemmings into muni funds. This sector is going to see a lot of pain, and it has nothing to do with federal tax brackets. It has to do with the fact that states and cities are having trouble paying their bills.

Defaults on tax-exempt bonds are the highest since my Distressed Debt Securities Newsletter began tracking defaults in 1983. In 2009, 183 issuers defaulted on $6.3 billon in tax-exempt debt. The majority of these defaults involved entities with taxing power (like the 99 Florida Community Development Districts). It’s only a matter of time before you start seeing defaults on the general obligation debt of state and local governments.

Lavish government pensions are the problem, as FORBES has well documented. Policemen, firemen and jail clerks retire young and collect inflation-adjusted pensions. There is far from enough money set aside to cover benefits already earned. The result is that the government employer will find itself paying two cops instead of one: the one who is now pounding the pavement and the one who was doing the job before.

Don’t expect economic growth or increased taxes to fix this problem, and don’t expect politicians to get tough with unions representing government workers. When the cash runs out, the pension checks still go out. It’s the bondholders who get stiffed.

The next hazard for muni bond owners is inflation. It takes a real act of faith to believe that the fiscal and monetary actions taken to stem the financial crisis will not lead to high inflation.

Washington has taken notice of the budget problems at the municipal and state levels. Aside from bailing states out of their deficits with donations to their operating accounts, federal politicians included in the economic stimulus package a subsidy of municipal financing for capital projects via Build America Bonds. This program creates a new kind of taxable municipal bond that comes in two forms. Tax Credit Build America Bonds pay bondholders taxable interest income but provide them with a tax credit equal to 35% of the interest received. The more popular alternative to these bonds among municipalities are Direct Payment Build America Bonds. For these bonds the Treasury provides the issuing municipality a 35% subsidy when each interest payment comes due. The bondholder in this case receives no tax deduction or credit, only a higher interest rate. These bonds are hugely popular with municipalities, so expect them to become a permanent federal program. They also have a ready market among corporate bond buyers who are suffering from a lack of new issues. Be careful when buying any of these bonds. You need to know which type of bond you are being offered, since the difference in interest yield will be significant.

Moody’s ( MCO ) says it’s changing the rating scale for some 70,000 municipal bonds to bring them in line with sovereign and corporate ratings. This may result in a short-term uptick in prices for the muni market, but the timing couldn’t be worse. I still don’t want to own these bonds.

If you must put some money in municipal bonds, look for insured bonds that got downgraded when the insurers got downgraded. The insurance may no longer be worth much, but the vetting by the insurance companies–which were pretty cautious about the borrowers they could trust–is still worth something.

by Briefing.com

BEIJING, Xinhua via COMTEX

China Interbank Bond Market Daily Review: T-bond prices hikes on lower floor yie

China’s T-bond prices headed up Monday on the news that the floor issuing yield of debentures has been lowered, which could help weaken expectation for further tightening in monetary policy. The National Association of Financial Market Institutional. Investors (NAFMII), an industry guild on China’s interbank market, announced to adjust down the lower limit of the issuing yield for super AAA debenture bonds, the third cut in 2010.

DJ ECB: Settled Covered Bond Purchases Reach EUR 48.546 Bln

FRANKFURT, Dow Jones Commodities News via Comtex

The European Central Bank and the euro zone’s 16 national central banks increased their purchases of covered bonds Friday, bringing the total volume settled to date to EUR48.546 billion, ECB data showed Monday. The data imply that the ECB settled some EUR301 million in purchases Friday. Covered bonds are generally issued by banks to refinance loans on commercial or residential mortgages, or loans to the public sector.