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| BondsOnline.com: instant access to and extensive coverage of over 3.5 million stocks, bonds, indexes and other securities covering major and emerging markets and exchanges across the globe. |
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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Corporates Can Handle Rising Rates |
Forges.com - Jan. 27, 2010 - by Matthew Craft
To pay for the surge of troops in Afghanistan, stimulus spending and a possible attempt at health care reform, the U.S government relies on the world buying Treasury bonds. With estimates that Treasury sales will top $1 trillion this year, it's widely expected that China's central bank and other investors will demand more in return, pushing interest rates higher. Rising yields on government debt would punish bond prices across the board, and Americans who've stuffed their savings in high-yield bond funds in the past year would get squeezed.
There's one problem with this scenario. Over the last 20 years, that's rarely how things have worked. Recent research suggests an increase in long-term interest rates this year could even lead to lower borrowing costs for companies deepest in debt.
That turns conventional wisdom on its head. A partial explanation for the stampede of companies selling bonds in early January was that Level 3 Communications ( LVLT - news - people ), Qwest Communications ( Q - news - people ) and Ford Motor Credit ( FCJ - news - people ), among many others, wanted to lock in low rates while they still could.
Even though corporate bonds need to pay a premium over relatively safe Treasuries, yields on low-rated corporate and government bonds tend to follow separate paths, according to a study by credit analysts at Bank of America Merrill Lynch and another by Martin Fridson, head of Fridson Investment Advisors. Bank of America's report shows that over the past year Treasuries had the lowest correlation to high-yield bonds than any other security. Over 10 years Treasuries trailed just behind the VIX, a gauge of stock market volatility.
In December the 10-year Treasury yield climbed from 3.2% to 3.84% and the speculative-grade yield dropped from 9.7% to 9%. Interest rates usually rise because of a stronger economy, a climate that supports companies with heavy debt burdens, Fridson says. Last year provided an extreme example. As investors gained confidence that the financial system wouldn't collapse, they sold off safe investments like Treasuries, pushing the yield up, and moved money out of cash and into riskier investments, pulling corporate yields down.
But in other years the two have moved in the same direction. From September 1998 to February 2000, 10-year yields were up 2.25 points and speculative yields up 1.10 points. How to account for that?
A lack of fear explains some of it. The Bank of America credit analysts note that when the yield spread between the bonds is usually under 5 percentage points, the median spread over the last 20 years, the two yields are more likely to move in the same direction. Tighter spreads imply little fear, so it seems that when investors see reason for optimism the two bonds have a connection. The Internet-crazed economy of 1998 and 1999 looked nothing like the Great Recession of 2009.
The typical junk bond pays a risk premium of 6.44 percentage points more than Treasuries, according to a Bank of America Merrill Lynch index, suggesting there's still plenty of fear around.
Bank of America sees the 10-year yield hitting 4.25% by the end of the year from the current 3.64%. If that happens and the economy improves, Fridson and others in the bond market say investors' perception of risk should shrink, which means junk bonds may fare better than U.S. debt.
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Income Security Recommendation January 2013 Issue.
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