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Bond Commentary

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The March of Corporate Bonds

by Jeff Rose on March 19, 2010

in Bond Commentary, LPL Financial

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.

The March of Corporate Bonds
Creative Commons License 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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Return of the “Quiet” Municipal Market

February 26, 2010 Bond Commentary
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The municipal bond market, as measured by the Barclays Municipal Bond Index, has moved along at a slow and steady pace this year in contrast to the gyrations in the taxable market. Recent market action harkens back to years gone by when the municipal bond market was known as the “quiet” bond market. Taxable bonds [...]

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White House Punts on Fannie and Freddie

February 18, 2010 Bond Commentary
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Earlier this month, the White House played the role of a NFL punter and punted the issue of what to do with Fannie Mae and Freddie Mac far downfield. In fact, maybe the next fi eld over. Bond investors had eagerly awaited details regarding the future of Fannie Mae and Freddie Mac, which together, stand [...]

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The Deficit and Interest Rates

February 3, 2010 Bond Commentary
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It is budget season in Washington and rising budget deficits remain at the forefront of the economy and financial markets. On Monday, February 1, the Obama Administration proposed a $3.8 trillion budget package that would result in a further increase in the budget deficit to $1.6 trillion, much more than the $1.3 trillion announced last [...]

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High-Yield, and Corporate Bonds, and the Fed, Oh My!

January 28, 2010 Bond Commentary
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Central banks have taken on a renewed focus for corporate bond investors given China’s recent moves to tighten monetary policy. Over the past two weeks, concerns over policy tightening in China have led to US Treasuries outperforming more credit sensitive corporate bonds. This week, all eyes shift towards the Federal Reserve’s Federal Open Markets Committee [...]

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Another Humdrum Conundrum

January 20, 2010 Bond Commentary
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In the middle of the past decade, the Federal Reserve (the Fed) increased the Federal funds rate steadily from mid-2004 through mid-2006 yet 10 and 30-year Treasury yields finished the tightening cycle roughly unchanged. When questioned why interest rates (bond yields) had barely budged Fed Chairman Alan Greenspan was at a loss for words and [...]

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Municipal Bonds New Issue Mirage

January 14, 2010 Bond Commentary
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Total issuance of new municipal bonds may set a record in 2010, but the real story for investors is the composition of new bond issuance. Wall Street forecasts range from $415 billion to $450 billion in new municipal bond issuance for 2010, with most forecasts clustered towards the upper end of that range.

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Yield Curve Flashes Green

January 7, 2010 Bond Commentary
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The yield curve is often cited as one of the market’s best leading indicators and rightfully so. The yield curve has been one of the more reliable economic indicators. An inverted yield curve, which occurs when long-term bond yields are lower than short-term bond yields, has proceeded each of the last five recessions.

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December Shapes Up as Microcosm of 2009

December 24, 2009 Bond Commentary
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Bond market performance in December is shaping up to be a microcosm of 2009: Treasuries under-perform while Corporate, High-Yield, and Emerging Market Bonds post strong out-performance. Also in keeping with the 2009 trend, Tax Exempt Municipal Bonds have out-performed Treasuries so far in December. Last week’s light volume was a sign the bond market has [...]

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Sovereign Setback- Credit Risk in Government Bonds

December 17, 2009 Bond Commentary
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Sovereign credit risk resurfaced in government bonds last week as the ratings agencies took negative actions on several countries. Fitch Investor Service downgraded Greece to BBB+ from A- a day after S&P put the country on Credit Watch Negative. S&P also placed Portugal’s A+ rating on Credit Watch Negative for a downgrade and placed Spain’s [...]

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Treasuries Take Employment Report in Stride

December 9, 2009 Bond Commentary
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The bond market reacted to last Friday’s better than expected employment report as it typically does to any stronger than expected economic report. Treasury bond prices declined and yields increased and corporate bonds, lower rated issues in particular, outperformed on the day. However, the reaction from Treasuries was relatively muted [...]

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TIPS (Treasury Inflation Protected Securities) at the Top?

December 2, 2009 Bond Commentary
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Treasury Inflation Protected Securities (TIPS) are one of the best performing fixed income sectors so far in the fourth quarter. The strength has led to substantially lower yields with the 10-year TIPS yield declining to 1.1%. Quarter-to-date through November 30, the 10-year TIPS yield has declined by 0.47% outpacing the 0.11% yield [...]

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Municipal Budget Woes Return

November 18, 2009 Bond Commentary
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December is the mid-way point in the fiscal year for states and municipalities. As we approach this milestone, a few recent reports from independent agencies highlighted the opening of new budget deficits for the current 2010 fiscal year. The Washington D.C. based Center on Budget and Policy Priorities reported budget deficits totaling [...]

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Keeping it Real on Bond Yields

November 12, 2009 Bond Commentary
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As we approach 2010, our outlook for fixed income markets in the coming year will, as usual, depend on the potential path of interest rates. One primary tool to assess the potential direction and magnitude of interest rate changes is evaluation of real, or inflation adjusted, yields. While the Fed has greater control of short-term [...]

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