Fixed Income Quarterly Review
Fixed Income Quarterly Review, 03 / 2008
Chart 1: The Treasury Yield Curve
The concerns in the credit markets, which began during the summer of 2007 continued through the first quarter of 2008. Expectations of Federal Reserve action, in the form of interest rate cuts, pushed Treasury rates down across all maturities.
The 2-year Treasury yield fell 146 basis points, beginning the quarter yielding 3.04% and ending at 1.58%. The 10- year Treasury yield fell 61 basis points, starting the quarter at 4.02% and ending at 3.41%. The 30-year Treasury yield fell 16 basis points, starting the quarter at 4.45% and ending at 4.29%.
Chart 2: The Shape of the Yield Curve
The Federal Reserve reaction to the worsening credit environment was to cut interest rates sharply during the quarter. A cumulative 2.00% drop in the overnight Fed Funds rate left that benchmark lending rate at 2.25% at the end of the first quarter. This was the largest drop in the Fed Funds rate since the fourth quarter of 1984 when rates were lowered 3.25% from 11.75% to 8.25%.
The shape of the yield curve, measured by the yield spread between the 10-year and 2-year Treasury yields increased dramatically during the quarter. The Treasury curve began the quarter with 97 basis points between 10-year and 2-year yields and finished with 182.
Chart 3: Corporate Bond Spreads
The yield spread on the Merrill Lynch Corporate Master index rose 97 basis point, beginning the quarter 203 basis points over Treasuries and ending 300 basis points over. Corporate bond spreads are currently at the widest levels recorded since 1986. Bond spreads of finance companies, most sensitive to the credit crunch, are widest with the Merrill Lynch Corporate Finance Master index spreads 330 basis points over Treasuries.
Chart 4: Intermediate Term Bond Market Performance By Sector
Safety continued to rule performance in the first-quarter as credit concerns drove investors further into the arms of government debt. U.S. Treasury notes were the best performers for the first quarter and as well as the trailing 12-month period. U.S. Agency notes were the second best performers over both periods, followed by mortgage-backed securities. The concerns of the credit markets took their toll on corporate bonds leaving them the worst investment-grade performers over the first quarter and trailing 12-month period.
Chart 5: Continuing Claims For Unemployment Benefits
Continuing claims for unemployment benefits continues to rise as the economy has slowed in recent months. Far from the highs reached during the summer of 2003, the number of people currently receiving unemployment benefits has risen steadily since reaching a low of 2.39 million in December 2006. As of March 2008, the continuing claims number stood at 2.94 million.
The steady, and recently accelerating, level of unemployment claims hints toward a further creeping up of the unemployment rate. This is further headwind to economic growth.
Chart 6: Jumbo / Conventional Mortgage Yield Spread
A conventional mortgage is one that, once created, can be sold to a Government Sponsored Entity (GSE) such as Fannie Mae. A jumbo mortgage is one that, due to its size, does not qualify to be sold to a GSE. During most periods the bond market has a sufficient appetite to support conventional and jumbo loans. Beginning in the fall of 2007, the appetite for jumbo loans effectively disappeared. The Federal Reserve's efforts to alleviate stress in the credit market has yet to reach this part of the mortgage market.
Between March 2003 and July 2007, the yield spread between jumbo and conventional mortgage rates averaged 17 basis points. During the first quarter of 2008, this yield spread increased from 82 basis points to 181 basis points
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.