Bond Market Perspectives

September 12, 2011- “Back to School with Municipal Funds”: Ongoing strength in Treasury prices and record low yields have provided a favorable tailwind to the municipal bond market for much of the summer. Despite price strength, municipal bonds failed to keep pace with Treasuries, causing municipal valuations to become more attractive. Nonetheless, municipal bonds have enjoyed good performance in 2011, with the broad municipal market up over 8% according to Barclays Index data, as the many municipal market fears at the start of the year have failed to materialize. As municipal bonds get back to school, there are challenges on the horizon but none likely to offset the positives underlying the municipal bond market. Ongoing strength in Treasury prices and record low yields have provided a favorable tailwind to the municipal bond market for much of the summer. Despite price strength, municipal bonds failed to keep pace with Treasuries, causing municipal valuations to become more attractive.

Nonetheless, municipal bonds have enjoyed good performance in 2011, with the broad municipal market up over 8% according to Barclays Index data, as the many municipal market fears at the start of the year have failed to materialize. As municipal bonds get back to school, there are challenges on the horizon but none likely to offset the positives underlying the municipal bond market. 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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