Fixed Income Investment Management
on Process and Discipline Behind the Process
shown in the equity markets is not being reflected in the corporate bond market. USD credit default swap spreads have
tightened this week. European credit default swap spreads have also tightened this week. Both investment grade
and high yield corporate spreads have tightened this week. Five-year swap spreads have tightened this week. LIBOR OIS
rates are down this week. The demand for predictable and uninterrupted income continues to be quite strong.
June 22, 2012
5 Necessities to Solving Sovereign Debt
1. A stable government
2. A financially sound and strong banking system...no run
3. An actionable plan for economic
4. Borrowing rates below growth rates
5. Acceptance that the central bank can only do so much.
The central bank does not legislate or control entitlements, tax policy, tax collections or government spending initiatives.
June 8, 2012
Germany's 10-year is at 1.16 percent. Sweden's 10-year is at 1.16 percent.
Japan's 10-year is at 0.81 percent. Swiss's 10-year is at 0.47 percent. US 10-year... will hit 1.00 percent soon.
June 1, 2012
The high yield
corporate bond market is poised to see spreads tighten by at least 50 basis points in the 1st quarter.
The spread has broken below 700 basis points, which has been a critical level for timing purposes. The first target
is a spread of 650 basis points, which was the low spread during the last four months. As yield starved investors look
for new opportunities in early 2012, money should flow to the high yield sector as corporate balance sheets and corporate
profits suggest minimal default risk. Spreads could conceivably retest the lows seen in 2011 of just under 450 basis
points, with enough money flows.
The investment grade corporate bond market is also poised to see spreads tighten 25-50 basis points in
early 2012. The spread widening of 2011 was partly a result of declining Treasury yields and concerns of contagion from
the European debt mess and GDP forecasts. With Treasury yields looking like a tight range in early 2012, spreads have
room to tighten.
municipal bond market will be hard pressed to repeat its total return performance of 2011. Uncertainty of individual
and corporate tax brackets in 2013 will create more buying opportunities for relative value and crossover investors in early
2012. Supply is expected to be tight, with the reinvestment of coupon payments and maturities keeping any significant
increase in tax-free yields limited. Defaults on municipal credits will continue to be limited to non-rated and
special situation revenue bonds.
January 3, 2012
The Treasury market has anchored its short term yields for the next 12 to18 months.
At the last FOMC meeting on Aug 9 to10th, Chairman Bernanke issued a warning that Fed-influenced short term rates would remain
at 0 to 0.25 percent into the middle of 2013. This should keep T Bills yielding less than five basis points,
with more days where short T bills have a negative yield. Two-year Treasury yields should stay anchored at 0.15
to 0.20 percent. If yields drop to zero percent for the 2-year Treasury in 6 months, the total return (price return
+ coupon return) will be an incredibly low 0.77 percent. If rates rise by 20 basis points in six months, the total
return will be a negative 0.40 percent. Five-year Treasury yields should be anchored at 0.50 to 1.00 percent.
A 25 basis points drop in yield of the 5-year Treasury in 6 months will deliver a total return of 3.03 percent. If
rates rise 25 basis points, the increase in rates will deliver a negative total return of 1.33 percent for the same
period. The yield of the 10-year Treasury is a different matter. Rates are not necessarily anchored at current
levels. If the economy continues to show no marginal growth, and if the employment report for the month of September
shows another zero percent increase or something similar in jobs creation, expect the yield on the 10-year to hit 1.50 percent.
A 25 basis point drop in the yield of the 10-year Treasury in six months will deliver a total return of 6.30 percent.
A rise of 25 basis points will deliver investors a negative return of 2.28% percent. Can the yield of the 10-year Treasury
increase 25 basis points in six months? Absolutely...from nothing other than just trading in a range of 2.25
percent and 1.75 percent.
September 9, 2011
The yield on the 2-year Treasury has set new lows at 0.17 percent. The yield on
the 5-year Treasury is comfortably below 1.00 percent. The yield on the 10-year Treasury traded briefly below 2.00 percent and
has since risen back to a retest of the 2.05 percent yield set in December of 2008. Investment grade corporate spreads
have widened to 12-month highs. High yield corporate spreads have also widened to 12-month highs. Both domestic
and international credit default swap spreads have widened to 12-month highs. The S&P 500 is down 15 percent the
past two months. Maybe Congress and Bernanke will get the message. It is time to stop the jaw-boning about ideologies
and start real and significant progress on strategy. The U.S. Government has been downgraded twice, once by Standard
& Poor's and once by the FOMC when it downgraded the economy. The 10-year Treasury could easy move to a 1.75 percent yield.
The yield on the 5-year Treasury could easily move to a 0.50% yield. And municipal bonds will continue to get their
alpha-ratings adjusted lower, but without any collateral damage to the principal and without any significant interruptions to
their coupon payments.
August 22, 2011
report released last Friday certainly gave the bond market enough reason to retest the low yields printed back in late 2010.
With the unemployment rate back above 9.00 percent and job creation an anemic 54,000, the 2-year failed to retest the 0.33
percent yield from November 4, 2010. The 5-year had enough fundamental reasoning to revisit the 1.35 percent level
from late 2010. The 10-year failed to stay below 3.00 percent for any length of time. The technicals (RSI, Stochastics,
Bollinger bands) all point to an overbought condition in Treasuries. With credit spreads slowly reversing their narrowing
trend, both in the investment grade and high yield market, and with CDS spreads both here and in Europe stubbornly moving
higher, maybe large monthly positive total returns for bonds have seen their best days for 2011. Political jawboning over
the debt ceiling is a real negative to pure investors who take the timely payment of interest quite seriously. A continued
sell-off in the S&P 500 is a positive for the bond market, but only if the bond market sees this retracement as a threat
to the uptrend….watch 1285 on the S&P. If this does not hold, the next move could be toward 1190.