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Shorter Duration Munis Hold Up While Longer Duration Munis Tumble

Senior Loans & High Yield Bonds

Looking Back When Interest Rates Rose

High Yield Bonds See Yields Continue to Rise

Stocks and Fed Fears

Shorter Duration Munis Hold Up While Longer Duration Munis Tumble

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Duration is everything in a rising interest rate market.

Short term municipal bonds have fared better than their longer term counterparts as money moves out of bond funds.

The S&P Short Term AMT-Free Municipal Bond Index has seen its weighted average yield remain fairly steady and has recorded a modestly down June so far of -0.11%. 

One year municipal bonds tracked in the S&P AMT-Free Muni Series 2014 Index have seen a positive return of 0.02% with its yield dropping by 1bp month to date. 

Five year bonds tracked in the S&P AMT-Free Muni Series 2018 Index have seen yields rise by 17bps pushing prices down and recording a negative 0.7% return month to date.

Ten Year bonds tracked in the S&P AMT-Free Muni Series 2023 Index have returned a negative 1.81% as its yield has risen by 21bps.  The yield of these non-callable, investment grade bonds is 2.85%.  Using a tax rate of 35%, the Taxable Equivalent Yield of these investment grade municipal bonds has moved to 4.38%.

Longer municipal bonds, in the 20 year and longer range, are tracked in the S&P 20+ Year Municipal Bond Index.  That index is down 2.4% in June so far with yields rising by 45bps since May.

For June, Puerto Rico has moved the most of any state or territory down 2.43%.  The longer duration characteristics of bonds from Puerto Rico tracked in the S&P Municipal Bond Puerto Rico Index isn’t helping as interest rates rise.  

High yield municipal bonds are off 2.12% for June so far.  Helping to push down the high yield market is the long duration tobacco settlement bond sector, the S&P Municipal Bond Tobacco Index is down 4.32% month to date. (In comparison, the S&P U.S. Issued High Yield Corporate Bond Index is down 1.51% month to date)

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Senior Loans & High Yield Bonds

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Duration is everything in a rising interest rate environment.  Senior loans, as tracked by the S&P/LSTA U.S. Leveraged Loan 100 Index are down 0.34% month to date. These floating rate below investment grade loans have seen their weighted average yield rise by 19bps since May month end.  Meanwhile, fixed rate high yield bonds tracked in the S&P U.S. Issued High Yield Corporate Bond Index, which have a longer duration than floating rate debt, have seen a negative 1.51% return in June so far.  Bonds in that index have seen a rise in yields of about 61bps since May.

Learn more about the characteristics of the loan market and the indices that track it as we host a webinar entitled ‘The State of the Bank Loan Market’ on June 20th. 

Registration is easy: http://bit.ly/1abdjmc

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Looking Back When Interest Rates Rose

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Source:  St. Louis Federal Reserve Bank and S&P Dow Jones Indices.  Daily data as of June 13, 2013 covering the period from December 31, 1992 to June 30, 1995.  Past Performance is not a guarantee of future results. It is not possible to invest directly in an index.
Source: St. Louis Federal Reserve Bank and S&P Dow Jones Indices. Daily data as of June 13, 2013 covering the period from December 31, 1992 to June 30, 1995. Past Performance is not a guarantee of future results. It is not possible to invest directly in an index.

With all the discussion about what might happen were interest rates to rise, it is worth looking at what has happened before. In 1994 the Fed tightened policy and interest rates rose faster and higher than investors expected.  The chart shows the yield on ten year treasury notes — the same instrument everyone is talking about today at a yield of about 2.2% — and the S&P 500.  As seen there, the market didn’t respond very much to the rise that began in late 1993 and early 1994; it did react when rates turned down late in 1994.  Of course there is no assurance that this time might be like the last time.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

High Yield Bonds See Yields Continue to Rise

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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High yield corporate bonds as tracked by the S&P U.S. Issued High Yield Corporate Bond Index have seen yields rise about 56bps since month end May driving a negative total return of 1.38% so far for June 2013. High yield municipal bond yields have risen by 30bps in the same time period as the S&P Municipal Bond High Yield Index is down 1.76% so far in June.  Duration is playing a key role as municipals are down more than corporates due to their longer duration.  The duration of the S&P Municipal Bond High Yield Index is 7.58 vs a 4.98 duration of the S&P U.S. Issued High Yield Corporate Bond Index.  The longer the duration, the more the prices will move given a change in the yield.High Yield Muni & Corporate Bond Index Yields June 12, 2013

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Stocks and Fed Fears

Contributor Image
David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Only a month ago the market was in love with the Fed and Ben Bernanke was a hero for helping the market move from 1350 in November to about 1670 in May.  Now the central bank is a villain as the yield on 10 year treasuries tops 2%.

Interest rates have risen in the last couple of weeks, but it is too soon to tell if this is the beginning of the long expected return to higher yields or if it’s random noise and over-reaction.  The fear is that a real change is upon us.  Why would interest rates rise? Four possibilities: inflation, stronger economic growth, a shift in Fed policy or just random noise in markets.  We can set inflation aside – it hasn’t changed in many months except for gasoline prices which appear to be slightly lower.  There is little evidence that people are worried about inflation – no news or comments, no buying in advance, and no excitement about gold.

Second: stronger economic growth.  For every five people worried about inflation, maybe there is one who expects stronger economic growth.  A pickup in the economy would push interest rates higher, but it would also boost profits and the market.  The evidence for a stronger economy is mixed – housing looks better, confidence is up but the job market is still worrisome.  Were interest rates being pushed up by the economy we would be seeing something in the economic numbers.

Next reason: the Fed.  In the last couple of weeks the Fed has said little and done nothing to even hint at a change in policy. Bernanke’s last speech was at the Princeton University commencement on June 2nd – and he said it was not about interest rates. The Beige Book, the FOMC’s report on the economy, didn’t see much change and the fed funds rate hasn’t moved.

Noise and worries:  Markets move on rumors, worries, hopes and fears and little else all the time.  Lately, complaints that the European Central Bank didn’t lower rates at its last meeting, worries that Japan won’t really try to restructure of its economy while the yen rebounds,  and stories about the 1994 bonds collapse. For those who don’t remember, in 1994 the Fed did tighten, interest rates rose, investors in mortgage backed securities lost  money. The following year the stock market started one of the best five year runs in history.

Wait until next week when the Fed’s policy unit, the FOMC, meets on June 18th and 19th.

The posts on this blog are opinions, not advice. Please read our Disclaimers.