Bond Market Highlights
- According to Moody’s, investment grade municipal debt had an average default rate of 0.03% from 1970 through 2009.
- Current muni market is shaped by historically steep yield curves and historically wide quality spreads.
- Anticipation of higher tax rates at both federal and state levels still exists.
- According to Moody’s, investment grade corporate debt had an average default rate of 0.97% from 1970 through 2009.
- Corporate spreads have narrowed considerably from a 25 year peak of 268bp to 153bp currently (AAA yields minus 1-yr Treasury yields).
- Current corporate market is shaped by a steep yield curve and still wide quality spreads.
- In early 2009, the spread between 10-yr B-rated corporate vs. treasuries peaked at over 1,200bp.
- At year end, spreads were around 425bp which compares favorably with the long-term average spread of approximately 250bp.
- The amount of “distressed bonds” fell to $117 billion from $250 billion six months ago. Distressed bonds yield at least 10 percentage points above benchmark rates.
- Current default rate near 13% as of 3Q ’09. Historical average is around 5%.
International Bonds – OIBYX (4th Quarter commentary)
- The Eurozone, particularly the export-driven economies of France and Germany, responded well to the turnaround in global manufacturing but strains within the euro family grew more prominent given the ongoing credit issues in Greece, Spain, and countries in Eastern Europe.
- In the wake of possible higher global interest rates, the team is continuing to under-weight developed market debt and over-weight emerging market country debt.
- Within the Developed Markets sleeve, the fund was largely able to side-step the issues surrounding Greece. The fund’s Greek bond exposure was drawn down to zero by late November.
- The break-even rate between yields on 10-yr Treasuries and TIPS, a measure of the outlook for consumer prices, has widened from 0.12% to 2.15% at the end of February.
- A newer gauge of investor expectations for inflation rose to 3.27% in early January, approaching the high of 3.36% reached in May ’04. This gauge, called the five year/five year forward break-even rate, was created by a Federal Reserve Bank insider.
- A survey of 80 financial services firms forecast CPI of 2.15% in 2010, 2.00% in 2011, and 2.30% in 2012.
Research & Trading Associate
March 2, 2010