There were more warnings today about falling oil prices and the knock on effect they will have on the U.S. energy junk bond market.

Tarek Hamid, a high-yield energy analyst at JPMorgan Chase & Co. estimates that up to 40% of all energy junk bonds could default over the next several years should oil prices fall below $65 per barrel and stay there for the next three years.

Mr. Hamid says that the 40% possible default rate is the upper limit over the next few years, and that energy companies will take steps to avoid falling into bankruptcy, including cutting spending and selling assets.

Still even if companies make smart moves to cut costs, with oil at $65 per barrel or below for the next three years, he estimates that default rates high-yield bonds from the energy sector could still hover around 20% to 25%. “It would become a very dire scenario,” Mr. Hamid said.

After a steep plunge in oil prices last week, WTI crude, the U.S. benchmark, was recently up 3% to $68.14 a barrel in Monday morning trading.

He predicts that not that many companies will default in 2015 because many companies have hedged their exposure. But he expects that energy companies will run into trouble in 2016 as even the most conservative energy companies will see most of their hedges run off.

Energy companies are the largest sector in the high-yield universe by a wide margin. The next largest sector, J.P. Morgan estimates, is the healthcare sector, which accounts for 7.1%.

Todays Other Top Stories

Municipal Bonds

Bloomberg: – Muni market set to shrink as Texas leads rising sales. – The U.S. municipal bond market is poised to contract in the next month as redemptions and maturing debt exceed the accelerating pace of new securities sales.

Bloomberg: – SEC raises pressure on borrowers as leniency ends. – As the leniency program ends, borrowers may face fines if they’re charged with fraud.

Glendale Star: – City eyes refinancing to save millions. – Over the next couple months, the City of Glendale plans to refinance much of its nearly $1 billion debt from bonds, lock in lower interest rates and reduce its obligations by as much as $27 million.

Bloomberg: – Munis extend record rally to 11th month with gains seen in 2015. – The $3.7 trillion municipal market extended a record win streak in November, rallying to end the month as state and local debt reached the cheapest relative to Treasuries since December.

Bond Market

Market Realist: – Why the Fed’s bond buying program has led to pricey assets. – With cash paying nothing and long-dated bonds barely keeping up with inflation, investors have bid up most asset classes in search of a decent return. However, according to Russ, there is one asset class that still looks cheap: volatility.

FT: – In parched bond markets, sparks are dangerous. – (Subscription) Liquidity risk prompts a push for transparency and electronic trading.

ValueWalk: – Leak at federal reserve revealed confidential bond-buying details. – The Federal Reserve sprung a previously unreported leak in October 2012, when potentially market-moving information about highly confidential monetary deliberations made its way into a financial analyst’s private newsletter.

Bloomberg: – Global bond yields decline to 18-month low on inflation outlook. – A gauge of government bond yields around the world fell to an 18-month low as tumbling oil prices push down inflation expectations and economic growth falters.

CNBC: – When time isn’t money: The concerning trend that could rule 2015. – Bond buyers are getting a lot less money for their time. The question now is whether that trend will continue in 2015—and what it will ultimately mean for investors.

Treasury Bonds

ETF Trends: – Investors can’t get enough of Treasury bonds, ETFs. – U.S. government bonds and Treasuries-related exchange traded funds advanced for the fifth straight day Wednesday as mixed economic data, low inflation and foreign investors helped keep the rally going.

Investment Grade

MarketWatch: – Medtronic selling at least $10 billion of bonds for Covidien acquisition. – Medical-device manufacturer Medtronic Inc. is expected to sell at least $10 billion of bonds Monday to help pay for its acquisition of Ireland’s Covidien PLC, making it one of the largest bond deals of the year, according to investors familiar with the deal.

FT: – Lower US bond yields spur corporate debt sales. – U.S. companies were preparing a slew of debt sales on Monday, with lower Treasury yields spurring activity and offsetting demands by investors for greater price concessions.

High Yield Bonds

Businessweek: – Beware the vulnerable oil debt that lurks in your junk-bond ETFs. – It pays to look a little closer at your investments in exchange-traded high-yield funds right now to find out just how exposed you are to plunging oil prices.

Emerging Markets

The Age: – Why Bostons $29 billion man avoids China. – Dan Fuss, 81, has made a career profiting off debt crises. In the 1980s, he loaded up on distressed Latin American assets others wouldnt touch. A decade later, to the consternation of peers, he bet on Malaysian and South Korean bond.

Citywire: – Why you should take care when assessing emerging market bond risk. – Investors should use a variety of measures when assessing emerging market bond risk.

Recorder: – Investors should use a variety of measures when assessing emerging market bond risk. – Foreign investors trimmed their holdings of Mexican corporate securities in the third quarter and sharply slowed their purchase of government debt due to worries about global growth and uncertainty over central bank policy in advanced economies, the central bank said on Tuesday.

FT: – The good, the bad and the ugly of emerging market debt. – (Subscription) As loose monetary policies designed to boost growth in developed economies continue to send money racing around the world in search of yield, 2014 has in fact been a good year for some emerging-market borrowers.

Catastrophe Bonds

Artemis: – Insurance buyers look to cat bonds, collateralized alternatives. – For years we’ve written that insurance companies increasingly look to alternative sources of reinsurance capacity, from insurance-linked securities (ILS) players and the capital markets. But now, according to Marsh, insurance buyers are looking at alternatives too.

Investment Strategy

Toma Hentea: – Rebalancing of fixed asset allocation portfolios: How often? – Frequent rebalancing of fixed income portfolios is not effective: it adds very little in returns, while increasing the drawdown. Best improvements were obtained by rebalancing at 36 months intervals, or at 30% deviation.

Income Investing: – Cut back on your bond investments heading into 2015 – LPL. – Year-ahead forecast season is officially upon us, and 2015 is shaping up to be a pretty underwhelming one for bonds, at least in the eyes of prognosticators. This week LPL Financial offers its expectations for 2015, and if you’re a bond investor, LPL says, you should keep your expectations – and your asset allocation that’s dedicated to bonds – low.

Morningstar: – Key risks in bond investing. – There are a number of risks investors need to consider in bond investing. Bonds are not as liquid as shares and issuers are at risk of default especially those with a high yield.

ETF Trends: – 3 ETF moves to make by year end. – As we round out the year, exchange traded fund investors should take a look at how they are positioned and begin thinking about any adjustments they should make going into the new year.

Bond Funds

FT: – Pimco suffers $100bn in redemptions from top funds. – (Subscription)  Pimco has accounted for half of the 10 funds with the biggest outflows so far this year – bleeding more than $100bn – as rivals snatched market share from the world’s largest bond manager while it struggled to contain management infighting.

Reuters: – Bond funds worldwide attract $204 bln inflows, beat stocks. –  Investors worldwide have poured $204 billion into bond funds year to date, easily surpassing inflows of $121 billion into stock funds, a Bank of America Merrill Lynch Global Research report showed on Monday.

About.com: – Best and worst bond funds in 2015. – There are a wide range of factors that can affect the performance of your bond funds, but the impact of the changing value of the U.S. dollar is underappreciated and frequently misunderstood.

WSJ: – Bond funds load up on cash. – (Subscription) Large bond funds are holding the most cash since the financial crisis as portfolio managers brace for potential price swings and unruly trading ahead of an expected Federal Reserve rate increase in 2015.

ETF Trends: – A Banner year for an international bond ETF. – Fixed income exchange traded funds focused on U.S. Treasuries have spent plenty of time in the limelight this year, but other bond funds have commanded well-deserved attention as well.

Biggest driver of bond yields today $tlt $tbt $ief is $mdt strange but true

— Peter Tchir (@TFMkts) December 1, 2014

Gundlach raised cash & took some non-agency exposure off the table in $DBL last month — David Schawel (@DavidSchawel) December 1, 2014