Third Quarter 2009 Fixed Income Market Review
October 15, 2009
Author(s):
Third Quarter 2009 Fixed Income Sector Returns (Pre-Tax)*
Third Quarter 2009 Fixed Income return per unit of Duration*
*as of 9/30/09 Source: Barclays Capital
Market Review
In the third quarter of 2009, continued improvement in household spending and the financial markets pointed towards signs of stabilization. However, a persistent high unemployment rate and continued challenges in the housing market posed challenges to the economy. Low interest rates, improved liquidity and improved demand from investors resulted in an increased supply of corporate debt during the third quarter. As a result, credit markets, generally, and high yield credits, specifically, extended their gains from the previous quarter. As widely expected, the Federal Reserve maintained its target range for the Fed Funds rate to a range of zero to 0.25% at its meetings on September 23, 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 shed light on improved market conditions by indicating that “…activity in the housing sector has increased. Household spending seems to be stabilizing…”. The Committee also indicated that they will gradually slow the pace of purchases of agency mortgage-backed securities (now scheduled to be completed by the end of the first quarter of 2010, instead of the previously planned end of 2009), in order to promote a smooth transition in markets. The yield curve slightly flattened, with the spread between the 10 year Treasury and the 2 year Treasury ending at 236 basis points as of September 30, 2009, down from 242 basis points as of June 30, 2009.
Fixed income posted strong positive returns for the third quarter ranging from 0.08%, for 3-month T-Bills, to 28.93%, for home equity asset-backed securities (“ABS”). Lower grade and longer maturity sectors posted the best performance. The broadly followed Barclays Capital U.S. Aggregate Index had a total return of 3.74% for the third quarter of 2009. Its yield decreased by 57 basis points from 4.12% on June 30, 2009 to 3.55% on September 30, 2009. The 6-month T-Bill Index had a total return of 0.18%, whereas the 2-year Treasury Index had a total return of 0.85% and the 10 year Index had a total return of 2.55%. The 30 year Treasury Index, with a total return of 5.60%, out-performed the 10 year Index by 305 basis points. The yield of the 2 year Treasury Index decreased by 16 basis points from 1.12% to 0.96%, the yield on the 10 year Index decreased by 21 basis points from 3.52% to 3.31% and the yield on the 30 year Index decreased by 26 basis points from 4.31% to 4.05% resulting in a slight flattening of the yield curve. Triple-B corporate credits continued their rally from the previous two quarters and out-performed triple-A corporate credits in the third quarter with a return of 11.15% versus 2.85%, for a difference of 830 basis points. Both the single-A and double-A corporate credit sectors also out-performed the triple-A sector with third quarter returns of 7.78% and 5.67%, respectively. The financial sector had a return of 9.44% with longer-dated financials returning 16.88%. Both the industrial and utility sectors underperformed the financial sector with returns of 7.31% and 7.85%, respectively. Mortgage-backed securities (“MBS”) produced a return of 2.31% for the third quarter and the duration of the MBS sector increased from 2.95 years as of June 30 to 3.08 years as of September 30, which contributed to an increase in the duration of the Aggregate Index from 4.30 years to 4.43 years as MBS accounted for 37.8% of the benchmark. In the third quarter, the tax-exempt municipal bond market also experienced positive results across the yield curve with longer maturity municipals posting the best performance. The total returns for the third quarter ranged from 0.96%, posted by 1 year municipals, to 12.75%, 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 6.60%, whereas 10 year Treasuries had a total return of 2.55% (a difference of 405 basis points); 5 year municipals had a total return of 3.75%, whereas 5 year Treasuries had a return of 2.09% (a difference of 166 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.
The indices designed, calculated and published by Barclays Capital are registered trademarks.
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