Fixed Income Quarterly Review
Fixed Income Quarterly Review, 6 / 2010
Chart 1: The Treasury Yield Curve
Risk avoidance entered the bond market in the second quarter with the result being a migration toward the relative safety of U.S. Treasury securities. The preference for the safety of Treasury notes drove Treasury prices up and yields down.
The 2-year Treasury yield fell 42 basis points, beginning the quarter yielding 1.02% and ending at 0.60%. The 10-year Treasury yield fell 90 basis point, starting the quarter at 3.83% and ending at 2.93%. The 30-year Treasury yield fell 82 basis points, starting the quarter at 4.71% and ending at 3.89%.
Chart 2: The Shape of the Yield Curve
The flight to quality in the bond market and subsequent purchasing of Treasury notes did not occur uniformly across all maturities. As the inflation rate became subdued and expectations of economic growth faded, investors became more comfortable buying longer term bonds.
The yield difference between 10-year U.S. Treasury rates and 2-year U.S. Treasury rates fell during the quarter from 280 basis points at the end of March to 232 basis points at the end of June.
Chart 3: Corporate Bond Spreads
Concern over slowing economic growth in the United States and abroad as well as sovereign debt concerns in southern Europe led bond market participants to lighten their holdings of corporate bonds.
Corporate bond risk, as measured by the extra yield corporate bonds offer over Treasury notes, increased during the quarter. The spread to Treasuries of the Merrill Lynch Corporate Master index began the quarter 161 basis points above. Corporate yield spreads widened to finish the quarter 209 basis points above Treasuries.
Chart 4: Intermediate Term Bond Market Performance By Sector
The overall lack of enthusiasm for risk seeking behavior during the second quarter led to Treasuries being the best performing investment-grade sector. The solid support for mortgage-backed securities led them to be the second best performing sector while U.S. agency debt was the worst.
Despite their lackluster second quarter performance, investment grade corporate bonds have been far and away the best performing sector over the trailing 12-month period with U.S. agency debt being the worst.
Chart 5: Euro-Dollar
The Eurozone is tied together by one currency, the euro, which is used across 16 countries. These countries, however, have separate fiscal agendas. When the over-indebtedness of a few of the Eurozone countries began to weigh on the consciousness of the financial markets, the euro experienced a swift downturn. With no separate currency, countries like Greece and Portugal can't devalue their way out of their debt crisis. The concern over a long term solution to Europe's debt problems was another reason for the aversion to risky assets during the quarter.
Chart 6: Bank Loans and Consumer Credit
A key indicator of a strengthening economy is a healthy appetite for assuming debt. Increasing loan demand is a sign that consumers and businesses feel comfortable servicing higher debt levels or see investment opportunities that will more than cover the debt assumed. As the economy slowed in 2008, borrowers were more interested in paying down debt levels than increasing them. This trend continues, although the pace of the falling loan levels appears to be moderating. While the amount of consumer and business loans continues to trend lower in the aggregate, these metrics should strengthen and support a pickup in economic activity eventually.
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.