Bond Market Perspectives
September 4, 2012 – “Diminishing Returns: the Bond Market Impact of QE3″: Federal Reserve (Fed) Chairman Ben Bernanke paved the way for additional bond purchases, known as quantitative easing, at last weekend’s (August 31-September 1, 2012) Jackson Hole meeting, helping the Treasury market extend its recent rally. Bernanke not only discussed the threat of lingering high unemployment on the economy and the need to counter this threat but also mentioned the benefits that previous large-scale bond purchases had on the domestic economy. Since peaking on August 16, 2012 at 1.86%, the 10-year Treasury yield has declined by 0.30%, aided in large part by investor anticipation that the Fed would re-enter the bond market aggressively with bond purchases. The recent Treasury rally was aided by the August 22 release of the August 1, 2012 Fed meeting minutes, where Fed officials showed a greater inclination towards additional monetary stimulus. View Full Article.
August 21, 2012- “Mirroring March”: The summer slump in the bond market continued as Treasuries finished lower for the fourth consecutive week for the first time since the end of 2010. After reaching a low of 1.39% on July 24, 2012, the 10-year Treasury yield has increased by 0.41% to Monday’s closing level of 1.80%. The current Treasury market pullback is now very similar to the March 2012 sell-off, which witnessed a 0.45% rise in the 10-year Treasury yield [Figure 1]. Unlike March, however, the move to higher yields this summer has been more gradual versus the quick, volatile spike witnessed last March. View Full Article.
July 2012 – Second Quarter 2012 – “Search For Income: Record Lows”: The 10-year Treasury yield reached a record low of 1.45% during the second quarter of 2012, pulling yields on other high-quality income-producing investments to, or very near, record-low yields as well. Treasury prices, which move in the opposite direction of yields, rebounded from a first quarter decline and pushed prices on all high-quality income-producing sectors, such as Investment-Grade Corporate Bonds, higher as well. Yields on Emerging Market Bonds and on lower rated bonds, such as High-Yield Bonds, were little changed over the second quarter, offering minimal relief to income-seeking investors. View Full Article.
April 2012 – First Quarter 2012 – “Search For Income: Still Challenging”: During the first quarter of 2012, Treasury yields increased most since the final quarter of 2010. Unfortunately, the increase in Treasury yields did not translate to other bond sectors, and the task for income-seeking investors remains challenging.
The increase in Treasury yields was offset by a notable decline in yield from some of our favorite income-producing sectors: high-yield bonds, emerging-market debt, and preferred stocks. Investors’ refocus on the
solid fundamental factors underlying all three of the above sectors sparked strong demand, and prices increased in response. In addition, European leaders’ bold action, including the European Central Bank’s (ECB) successful three-year lending operations, helped ease European debt fears. In sum, the reduction of risk helped boost prices of more economically sensitive highyield bonds, investment-grade corporate bonds, emerging-market debt, and preferred stocks View Full Article.
January 10, 2012 – “Municipal Bonds Ring in the New Year”: A favorable supply-demand balance, attractive valuations, and firm demand helped Municipal bonds begin 2012 on a strong note.
A comparison of current supply levels versus one year ago suggests Municipal strength may continue, but we do not expect a repeat of the solid 2011 full-year gains. View Full Article.
August 16,2011- “Pessimism & Opportunity”: Treasuries moved to price in a recession following a volatile week in financial markets that led to strong safe-haven related gains. Turmoil in Europe and recent action from the Federal Reserve (Fed) clouds interpretation, but the Treasury market’s pessimistic message is clear. The downgrade of Treasuries to AA+ proved to be inconsequential to bond investors as Treasury prices surged and yields fell by 0.1% to 0.3% across the maturity spectrum. The 10-year Treasury yield fell to within a few basis points of the 2.06% low achieved during the fall of 2008. Was the surge justified? Over the past 14 trading sessions, the price on the 10-year Treasury increased at a rate that would put the yield at a zero by mid-October. Such a pace is unsustainable and we believe the Treasury market may have overshot. View Full Article.
July 25, 2011- “Life Without a AAA Rating”: The bond market is beginning to ponder just what life would be like without a AAA rating on Treasuries. In July 2011, all three of the major ratings agencies — Moody’s, S&P, and Fitch — placed the AAA rating of Treasuries on watch for a downgrade due to the risk that the debt limit may not be increased before the August 2 deadline. If an agreement is not reached in time, which we view as highly unlikely, we still believe the Treasury will be able to service its debt obligations (see last week’s Bond Market Perspectives) but will likely result in a ratings downgrade even if temporary. Although President Obama and Congress remain at odds over how to resolve the debt ceiling impasse, we continue to believe that a deal will be struck before the August 2 deadline. View Full Report.
July 19, 2011- “Treasuries and the Debt Limit”: The Treasury market continues to shrug off debt limit concerns even as negotiations between Democrats and Republicans deteriorated. With an agreement on raising the debt limit seemingly farther apart and the August 2 deadline only two weeks away, the Treasury market failed to show any visible signs of worry. In fact, Treasury yields closed lower last week with the benchmark 10-year yield closing back below 3.0% [Chart 1]. It seems contradictory that as the United States approaches a possible technical default, its government bond prices remain near recent highs.
The most obvious explanation for Treasury market resilience is simply that the vast majority of bond market participants do not believe that a default will occur. We agree. We believe an agreement will be reached and view a default as extremely unlikely. View Full Report.
July 12th, 2011-”Municipals at Mid-Year”: The start of 2011 witnessed apocalyptic warnings over the future of the municipal market that simply failed to materialize. Through the first half of 2011, investment results were anything but gloom and doom with high quality municipal bonds up 4.4%, according to the Barclays Municipal Bond Index. In recent weeks, municipal bond performance has slowed with prices of most bonds modestly lower but we do not see the Four Horsemen galloping into this market.
Nevertheless, we continue to find municipal bonds an attractive high-quality bond option over the second half of 2011. Attractive valuations, compelling after-tax yields, low defaults, and limited new issuance all supported the municipal market during the first half of 2011. A review of each factor reveals what the second half of 2011 may hold for municipal investors. View Full Report.
April 5, 2011 – “Get Used To It”: The first quarter of 2011 is now history in the bond market but may serve as a blueprint for what bond investors can expect over the second quarter and perhaps beyond. On balance, high-quality bond prices were flat-to-down with interest income providing the bulk of a modest 0.4% total return from the broad Barclays Aggregate Bond Index. Pockets of opportunity do exist, such as high-yield bonds, but high-quality bond investors should get used to the experience of the first quarter of 2011.
The low-return environment is likely to persist for high-quality bonds. Over the first quarter, bond yields were pressured upward by signs that the economy continues to expand at a 2.5 – 3.0% annualized pace, a trend we expect to continue. On the first day of April, investors were greeted with more of the same news as the March employment report revealed that pace of job creation is increasing. In addition, inflation accelerated over the first two months of 2011, and, looking forward, the Federal Reserve (Fed) will very likely end Treasury bond purchases in June and slowly turn its attention to removing monetary accommodation. In combination, these events are negative for high-quality bonds. View Full Report.
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