After The Fireworks

It was back to business in the U.S. after the July 4 holiday, which fell on a Thursday this year and made for a much needed four day weekend. The bond markets had a lot to look forward to this week as the Treasury auctioned a total of $66 billion of issuance in three, 10, and 30-year paper. The auctions saw investors take advantage of higher yields that have resulted from the post FOMC meeting announcement of June 19. The July 10,2013, release of the Fed’s minutes from the June 18-19 FOMC meeting contained mixed language referring to “many” officials wanting to see more signs that employment is picking up before they would be willing to begin slowing the pace of their market stimulus. The Fed has been purchasing $45 billion of Treasuries and $40 billion of mortgage backed securities for a total of $85 billion in monthly stimulus. The S&P/BGCantor 7-10 Year U.S. Treasury Bond Index’s yield, which topped out at 2.47% on July 5, was returning to its recent peaks, closing at 2.43%. Shortly after the release of the meeting notes, Fed Chairman Ben Bernanke was quoted as saying “highly accommodative monetary policy” is needed for the foreseeable future as a jawboning action to stem the recent market sell-offs. The following day, bonds rallied as the July 11 number of initial jobless claims unexpectedly increased to a two-month high of 360,000. In the end, market participants remain suspicious that policy makers remain committed to slowing asset purchases, and this week’s report hints that more policy makers are getting behind a shorter time frame than previously thought. The S&P/BGCantor U.S. Treasury Bond Index, which measures the performance of all notes and bonds, has returned -0.49% month-to-date and is down -2.02% year-to-date.

Investment grade bonds, as measured by the S&P U.S. Issued Investment Grade Corporate Bond Index, are looking to crawl back from a difficult past two months (-2.25% in May, -2.49% in June). The index is currently returning -0.54% month-to-date and -3.65% year-to-date. The longer maturities of the index, which average 9.75 years and duration of 6.36 years, hurt the index at a time when short durations were the only protection to interest rate risk.

Leveraged loans, on the other hand, have held a steady return of 0.37% for the month and 2.33% for the year as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index.

Usually, the high yield market is mostly concerned with credit stories. The focus of portfolio managers is on company fundamentals, earnings projections, and management teams. That is one reason why, at times, market participants look to the equity markets as much as the fixed income markets when studying high yield. Last month added an additional twist as interest rate risk became just as important to this segment of the market as the rest of the bond markets. After a crushing -2.56% return for June, the S&P U.S. Issued High Yield Corporate Bond Index has been able to squeeze out a month-to-date return of 0.26%. The index is still in the green with a 1.42% year-to-date return. When looking at just price return, the index is actually down -2.2% for the year, but a significant amount of the return is its higher yielding income return, which has added 364 basis points year-to-date.

Fixed Income Total Return Table as of 20130710

 

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