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Wednesday, July 29, 2009

Fixed Income Recap



The results were less than desirable, but I don’t feel this is any sort of “beginning of the end” type situation for the Treasury. Although you might read other blogs and articles that paint a much dire picture, I don’t think yesterday’s results were all that terrible. The long end of the curve rallied which would not have happened if the less than stellar auction was the result of some large underlying problem. And even the bonds that will be auctioned today and tomorrow hung in there. The 5-year was down but outperformed the lagging 2-year and the 7-year finished higher for the day – a good sign despite the sloppy auction.

S&P cut its rating on Ambac from BBB to CC, just two notches above default status. Moody’s dropped its rating on Ambac to junk status in April, so this is no monumental development but it could have an effect on the market. S&P was the last ratings agency to maintain an investment grade rating on Ambac insurance, and now that it’s gone it could force some selling in Ambac insured issues. Municipal bonds are largely owned by retail investors with money managers that have strict guidelines on owning only investment grade issues. Many smaller municipal issuers aren’t rated themselves, so they rely entirely on the rating of the insurance. There are still a few bond insurers that remain AAA, and some issuers have already chosen to repurchase insurance for their outstanding debt. I expect more to do the same with this recent downgrade.


Cliff J. Reynolds Jr., Investment Analyst

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