Daily Money Tip: A healthy bond market for 2014, says strategist

Posted: January 24, 2014

Should bond investors expect as much Federal Reserve bank influence in 2014? Not so much. And that signals a healthy bond market.

Why? We asked Guy LeBas, Janney Montgomery Scott's fixed-income strategist, and he explained that 2013 was "all about what the Fed said they'd do, not what they actually did."

The Fed indicated it would be slowing down and ultimately ending its bond-buying program in 2014.

"Given the clarity of the Fed's message, we believe the markets are better incorporating Fed policy, and future increases in long-term interest rates will be more gradual," argued LeBas, based in Center City.

LeBas noted that 2013 marked the five-year anniversary of the 2008 credit crisis, and another year of benign credit conditions - not just in the corporate market, but in municipal markets as well, he adds.

"Defaults are low, and the reason is crucially important," he explained. "There's not all that much coming due. For an issuer to default, they need to owe debt, to have bonds or loans maturing, that can't be rolled over. For 2014, this relationship of little debt maturing leading to little default should persist.

"In the corporate markets, less than $100 billion of high-yield bonds and loans are set to come due in 2014."

While data on municipal issuers are less reliable, refinancings in recent years suggest "defaults in both the corporate and the muni markets should remain low in 2014," LeBas said.

Three worries that affected the fixed-income landscape in 2013 - Fed tapering, the U.S. government's fiscal cliff, and the credit cycle - are receding in 2014, LeBas believes. Investors should expect: "Slower pace of rising rates, limited short-term fiscal interference with the markets, and continued solid credit quality in both the corporate and municipal markets."

LeBas's comfort in the bond environment might seem out of step with the problems confronting Pacific Investment Management Co. (Pimco), which has seen investors pull $41 billion from the world's largest bond fund and on Wednesday learned well-regarded executive Mohamed El-Erian was exiting.

LeBas has answers.

The bond mutual fund outflows, like what Pimco has confronted, continue but have slowed. Some bond fund investors have pulled money out; other funds, like munis, have seen inflows, he said.

Regarding El-Erian, LeBas said, he "is a brilliant guy who moves jobs frequently, and has always harbored political aspirations. I don't think it has anything to do with outflows in Pimco bond funds."



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