Second Quarter 2009 Fixed Income Market Review
July 15, 2009
Author(s):
Second Quarter 2009 Fixed Income Sector Returns (Pre-Tax)*
Second Quarter 2009 Fixed Income return per unit of Duration*
*As of 06/30/09. Source: Barclays Capital
In the second quarter of 2009, as the improvement in household spending and the financial markets pointed towards signs of stabilization, a high unemployment rate and expectations of higher inflation posed challenges to the economy. Consumers continued to face headwinds as rising oil prices and mortgage rates added to the weakness in consumer confidence. In keeping with its promise to employ all available tools to promote economic recovery and to preserve price stability, the Federal Reserve kept its target range for the Fed Funds rate to a range of zero to 0.25% at its meetings on June 24, 2009 and stated that “…economic conditions are likely to warrant exceptionally low levels of federal funds rate for an extended period…”. In a statement following its last meeting, the FOMC provided some positive outlook by indicating that “…the pace of economic contraction is slowing…Businesses appear to be making progress in bringing inventory stocks into better alignment with sales…”. The yield curve steepened further, with the spread between the 10 year Treasury and the 2 year Treasury ending at 242 basis points as of June 30, 2009, up from 186 basis points as of March 31, 2009.
Fixed income returns for the second quarter ranged from negative 11.42%, posted by the 30-year Treasury, to positive 22.76%, posted by longer maturity financials. The broadly followed Barclays Capital U.S. Aggregate Index had a total return of 1.78% for the second quarter of 2009. Its yield increased by 6 basis points from 4.06% on March 31, 2009 to 4.12% on June 30, 2009. The 6-month T-Bill Index had a total return of 0.17%, whereas the 2-year Treasury Index had a total return of -0.11% and the 10 year Index had a total return of –6.21%. The 30 year Treasury Index, with a total return of –11.42%, under-performed the 10 year Index by 521 basis points. The yield of the 2 year Treasury Index increased by 32 basis points from 0.80% to 1.12%, the yield on the 10 year Index increased by 83 basis points from 2.69% to 3.52% and the yield on the 30 year Index increased by 74 basis points from 3.57% to 4.31% resulting in a significantly steeper yield curve. Triple-B corporate credits continued their rally from the first quarter and out-performed triple-A corporate credits in the second quarter with a return of 12.83% versus 0.20%, for a difference of 1,263 basis points. Both the single-A and double-A corporate credit sectors also out-performed the triple-A sector with second quarter returns of 9.09% and 5.52%, respectively. The financial sector had a return of 14.67% with longer-dated financials returning 22.76%. Both the industrial and utility sectors underperformed the financial sector with returns of 8.13% and 9.01%, respectively. Mortgage-backed securities (“MBS”) produced a return of 0.70% for the second quarter and the duration of the MBS sector increased from 1.54 years as of March 31 to 2.95 years as of June 30, which contributed to an increase in the duration of the Aggregate Index from 3.73 years to 4.30 years as MBS accounted for 38.1% of the benchmark.
In the second quarter, the tax-exempt municipal bond market experienced positive results across the yield curve with longer maturity municipals posting the best performance. The total returns for the second quarter ranged from 0.54%, posted by 1 year municipals, to 4.53%, 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 0.94%, whereas 10 year Treasuries had a total return of -6.21% (a difference of 715 basis points); 5 year municipals had a total return of 0.76%, whereas 5 year Treasuries had a return of -3.25% (a difference of 401 basis points).
Past performance is no guarantee of future results. Indices are gross of fees and 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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