Fixed Income Recap

Supply pressures crushed Treasuries in trading Thursday. The five-year was off 20/32 of a point in price while the ten-year traded lower by almost 2 points by late afternoon. The benchmark curve steepened by 14 basis points, a large move even by today’s standards. A basis point represents .01%.

The seven-year Treasury Note will likely be brought back after a 16 year hiatus according speculation. Just showing how the Treasury is trying desperately to squeeze all demand out of the market by filling every gap along the curve.

The Fed announced $16.8 billion in Agency MBS purchases for seven day period ending yesterday. At this point the Fed appears to have settled into a steady range of $15 to $18 billion per week in purchases.

The Four Primary Risks of Bonds

Credit
Duration
Liquidity
Structure

Credit Risk
Perhaps the most straightforward of the four risks of fixed income investing, credit risk has the potential to be the most severe.

Credit risk, also known as default risk, is the risk that the borrower will not be able to make principal and interest payments in a timely manner. The market prices the risk of default by demanding a higher return for lending money to companies or individuals who are more likely to default.

“High Yield Bonds”, otherwise called “Junk” bonds, are traditionally those who are issued at a higher yield relative to the market, usually by companies with poor credit ratings.

I will talk about the other primary risks of bonds in upcoming issues.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst