• The past 12 months has been a bit of a wild ride in the muni market, largely based on the big sell-off due to Meredith Whitney’s proclamation and subsequent rebound once cooler heads prevailed.
• Quarterly new issuance was at the lowest level since 2000 but that has done little to boost enthusiasm for tax-exempt debt given on-going headline risk on muni finances.
• Current yield curve remains quite steep at a 10-year high of 400 bps. Credit spreads also remain high, driving investors to lesser quality names in the hunt for yield.
• Anticipation of higher tax rates at both federal and state levels still exists. At many points along the curve, muni yields remain higher than Treasuries.
• Approximately 64% of new issuance is being used to refinance current debt.
• According to Barclays, corporates in both the US and Europe remain focused on delevering and extending maturity profiles. Furthermore, according to Crandall Pierce, corporate profits after tax are back above peak levels reached prior to the recent recession.
• Current corporate market is shaped by a steep yield curve (500+ bps). Moody’s indicates the spread between Aaa and Baa is running around 100 bps after a peak of nearly 340 bps in 2008. Barclays reports 132 bps spread between US Treasuries and US Credit. 10-year mean is ~ 168 bps.
• All major high yield markets have seen fund inflows as investors become less risk averse in the search for yield.
• Default rates have plummeted. According to Barclays, the Moody’s issuer-weighted speculative-grade default rate has dropped over the past year from a peak of 14.7% in 11/09 to around 3% today. The historical average is around 5%. Projections for 2011 are around 2-2.5%.
• The current high yield spread vs. Treasuries is ~ 515 bps. 10-year mean is ~ 650 bps.
International Bonds – OIBYX (1st Quarter commentary paraphrased)
• Exposure to Argentina, the Ukraine, and Russia helped fund performance while very limited exposure to troubled Eurozone names provided some defensive strength. Germany’s economic expansion is robust.
• Despite oil price shocks, tightening by some EM central banks, and the tragic events in Japan, the global expansion is expected to continue.
• The emerging market debt universe continues to have positive long-term prospects due to burgeoning middle classes and favorable demographic support. Additionally, improving credit fundamentals bolster their positive outlook for the entire sector.
• 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 2.64% on April 11, 2011, the highest in nearly five years.
• Through 3/31/11, the year-over-year change in the Consumer Price Index (CPI) is 2.7%. The core CPI, less food & energy, is 1.2%.
• The US Treasury market is shaped by a steep yield curve (450 bps). As of April 14, 2011: 1-month T-Bill yield = 0.03%, 5-year yield = 2.13%, 10-year yield = 3.42%, 30-year yield = 4.50%.
Mark A. Lewis
Research & Trading Associate