First Quarter 2009 Fixed Income Market Review
April 15, 2009
Author(s):
First Quarter 2009 Fixed Income Sector Returns (Pre-Tax)*
First Quarter 2009 Fixed Income return per unit of Duration*
*As of 03/31/09. Source: Barclays Capital
In the first quarter of 2009, global economies continued to suffer heavy losses and the financial markets continued to trade in an extremely volatile fashion. Consumers faced headwinds as their household net worth sharply declined due to a precipitous fall in housing and equity prices resulting in very low consumer confidence. In keeping with its promise to employ all available tools to promote economic recovery and to preserve price stability, the Federal Reserve, as expected, voted to keep its target range for the Fed Funds rate to a range of zero to 0.25% at its meetings on March 18, 2009 and stated that “…economic conditions are likely to warrant exceptionally low levels of federal funds rate for an extended period…”. In a surprise move, the Fed announced its intention to purchase up to $300 billion of longer-term Treasury securities over the next six months in an effort to reduce borrowing costs and spur lending by financial institutions. This announcement prompted the biggest one-day rally of longer-term U.S. Treasuries with the yield on the 10-year Treasury moving from over 3% to around 2.5%. This rally, however, subsequently faded as the concerns over increased supply to fund Government programs, coincided with the Federal Reserve’s intention of buying of longer maturity U.S. Treasuries. The yield curve steepened, with the spread between the 10 year Treasury and the 2 year Treasury ending at 186 basis points as of March 31, 2009, up from 145 basis points as of December 31, 2008.
Fixed income returns for the first quarter ranged from negative 13.45%, posted by the 30-year Treasury, to positive 12.14%, posted by Credit Card Asset-Backed Securities. Longer maturity financials and longer maturity Treasuries exhibited the worst absolute returns for the first quarter. The broadly followed Barclays Capital U.S. Aggregate Index had a total return of 0.12% for the first quarter of 2009. Its yield increased by 7 basis points from 3.99% on December 31, 2008 to 4.06% on March 31, 2009. The 6-month T-Bill Index had a total return of 0.14%, whereas the 2-year Treasury Index had a total return of 0.40% and the 10 year Index had a total return of –2.68%. The 30 year Treasury Index, with a total return of –13.45%, under-performed the 10 year Index by 1,077 basis points. The yield of the 2 year Treasury Index increased by 2 basis points from 0.78% to 0.80%, the yield on the 10 year Index increased by 44 basis points from 2.25% to 2.69% and the yield on the 30 year Index increased by 88 basis points from 2.69% to 3.57% resulting in a much steeper yield curve. Triple-B credits out-performed triple-A credits in the first quarter with a return of 1.25% versus 0.51%. Both the single-A and double-A credit sectors underperformed the triple-A sector with a first quarter return of –2.99% and –3.41%, respectively. The single-A and double A sectors are dominated by financial companies, many of which have been directly impacted by the current credit crisis. The financial sector had a return of –7.82% with longer-dated financials returning –19.61%. Both the industrial and utility sectors outperformed the financial sector with returns of 1.30% and 3.68%, respectively. Mortgage-backed securities (“MBS”) performed relatively well with a return of 2.20% and the duration of the MBS sector increased from 1.31 years as of December 31 to 1.54 years as of March 31, which contributed to a slight increase in the duration of the Aggregate Index from 3.71 years to 3.73 years.
The tax-exempt municipal bond market experienced strong results in the first quarter with longer maturity municipals posting the best performance. The total returns for the first quarter ranged from 1.37%, posted by 1 year municipals, to 7.30%, posted by long (20+ year) municipals. Tax-exempt municipals outperformed Treasuries across all maturities as evidenced by the fact that 10 year municipals had a total return of 3.41%, whereas 10 year Treasuries had a total return of -2.68% (a difference of 609 basis points); 5 year municipals had a total return of 2.18%, whereas 5 year Treasuries had a return of 0.52% (a difference of 166 basis points).
Past performance is no guarantee of future results. Indices are not available for direct investment. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
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