Fixed Income Recap

Investors rushed toward the safety of Treasuries today on retail sales data that came in weaker than expected. The two-year finished up 1/32, and the ten-year was higher by 29/64. The benchmark curve flattened by 4 basis points, and currently sits at +224.5 bps. A basis point represents .01%.

Credit

While stocks have pulled back over the past few days, corporate bonds have been doing the opposite. Comparable Treasuries are up a little over the same period, but not nearly enough to justify how credit has outperformed stocks this week. The following graph compares the performance of CSJ (1-3 Year Credit ETF) and SHY (1-3 Year Treasury ETF) month to date.

And this graph shows CSJ and the S&P 500 over the same period.

Successful non-guaranteed bond offerings from Morgan Stanley and Bank of America and upcoming issues from American Express and J.P. Morgan are likely to blame for this outperformance. These companies have benefitted from the Temporary Liquidity Guarantee Program, which allows banks to issue corporate debt with a guarantee from the FDIC. In order to repay TARP, the Treasury is requiring banks to show the ability to issue debt without the guarantee, which has prompted several to do so.

Although debt costs will increase without a backstop from the FDIC, this new issuance shows that the credit markets have come a long way since last fall.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst