Bond Commentary

At the end of February, corporate bond investors were likely pleased with year-to-date 2010 investment performance. Both Investment-Grade Corporate Bond and High-Yield Bond performance was positive, however, a closer look revealed that Investment-Grade Corporate Bonds barely edged out Treasuries while High-Yield Bonds actually underperformed Treasuries through the first two months of 2010 [See table ]. The first two weeks of March have witnessed strong out-performance of Investment-Grade Corporate Bonds and High-Yield Bonds relative to Treasuries. While only a short period of time, we view the performance in March positively as corporate bonds kept pace during a favorable period for Treasuries. More importantly corporate bonds showed resilience, and in the case of High-Yield Corporate Bonds outright gains, as Treasury yields turned higher.

photo credit: Blujeeves

Both Investment-Grade and High-Yield Corporate Bonds continue to exhibit improving fundamentals, a primary driver of a strong start to March. Creditworthiness depends upon generating the earnings to support interest payments. With fourth quarter 2009 earnings season all but over, 72% of companies in the S&P500 Index surpassed earnings expectations. Excluding Financials, which posted large gains given a very depressed fourth quarter of 2008, earnings increased a healthy 11.8% in the fourth quarter of 2009 compared to the fourth quarter of 2008, according to Bloomberg. While good earnings reports reflected cost cutting and improved productivity, top line revenue growth also increased in another positive sign for the sector. Revenue increased 6% overall, 3% excluding financial firms, during the fourth quarter of 2009 versus the same quarter in 2008.
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