Fixed Income Recap

Treasuries
Treasuries dismissed the happenings in the stock market today as traders became more concerned with the $63 billion in supply to come this week.

The two-year finished unchanged while the ten-year was higher by about 1/16 of a point. The benchmark curve flattened by 3 basis points on the day. A basis point represents .01%.

The Treasury will auction $34 billion in three-year notes on Tuesday, $18 billion in 10-year notes on Wednesday and $11 billion in 30-year bonds on Thursday.

Corporate Bonds
Credit spreads have taken a beating so far this year. The bond ETF (Exchange Traded Fund) LQD, which follows the iBoxx Investment Grade Corporate Bond Index, is down 11.75% since January 9th, while the S&P 500 is down 24.02% over the same period. The correlation between the two is expected, with corporate debt being less volatile than stocks due to the priority they are given in the capital structure.

A deepening recession and lower expectations for future earnings have hurt stock prices and increased probabilities of default across the board. There is no telling how many defaults will come about through all of this, but staying highly diversified, as opposed to picking just a few names, has its advantages.

LQD is currently yielding 7.12%, while providing exposure to 70 or so different companies across many industries with an average credit rating of A2/A and a 6.7 year duration. The cost of the diversification you get though an ETF like LQD is minimal when considering the unsystematic credit risk you take by building a basket of 7-10 names, in addition to liquidity risk. You may be able to pick up a small bit of yield over the etf by doing so, maybe .5% depending on the execution, but in our view buying the ETF makes much more sense on a risk adjusted basis.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst