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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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| More |
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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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Inflation Expectations May Be Heating Up
As commodity prices skyrocket around the world, interest rates have been steadily rising. |
MORNINGSTAR - Feb. 7, 2011 - by Dave Sekera
The Morningstar Corporate Bond Index ended last week at a spread of 144 basis points, essentially unchanged from the prior week and 6 basis points tighter since the beginning of the year. We believe credit spreads will tighten further over the course of the year as credit metrics and the economy continue to improve. However, credit selection and covenant protection will be extremely important, as we expect private equity funded leveraged buyouts to increase.
Continued withdrawals from municipal bond funds are causing further dislocations in the municipal bond market. As we highlighted last week, this turmoil is forcing portfolio managers to sell what they can, not what they want to. While the negative headlines have caused an increase in near-term default expectations, we believe the risk is overblown. Tax-exempt municipal bond yields are now trading at or above taxable bond yields for similar credit risks. This has provided an attractive opportunity for investors willing to conduct their own due diligence to pick up extra return on a tax-equivalent basis. Some of the best opportunities exist where the underlying credit risk is a corporate entity that issued debt through a municipal entity that is essentially just a tax-exempt conduit, such as industrial development revenue bonds and pollution control revenue bonds.
Inflation expectations have become a hotly contested issue in the credit markets. Recent economic indicators such as the ISM Index, Purchasing Managers Index, and regional Federal Reserve surveys have revealed an underlying trend in their prices paid components. Morningstar's consumer product team has also highlighted this trend in underlying raw-material costs. As commodity prices skyrocket around the world, interest rates have been steadily rising. Indicative of this concern is the increase in the 10-year Treasury, which rose 30 basis points last week to 3.63%--133 basis points off the low in October 2010 and the highest yield since May 2010. The steepening of the yield curve also suggests that investors are becoming increasingly worried about inflation. For example, the spread differential between the 2-year and 30-year Treasury is currently 400 basis points, the widest it has ever been.
Europe
Sovereign credit spreads gapped tighter across the board on seemingly no new news. Credit default swaps in Portugal, Ireland, Greece, and Spain each tightened by 50 basis points or more over the course of the week. The trading levels are similar to where the credit risk was priced last October before the runup caused by Ireland's credit crisis. Corporate credit spreads in Europe followed this trend and tightened as well. With the pressure being taken off the sovereign credit spreads, the European financial sector outperformed last week and tightened about 10 basis points.
New Issue Market
Johnson Controls (ticker: JCI; rating: A), a maker of batteries, seats, and electronics for automotive customers and control systems for industrial users, sold $1.6 billion of notes in a four-part offering. The firm issued $800 million of 3-year debt split between a 1.75% fixed rate piece (T+75) and a floater at L+41. The other pieces were a 10-year at T+90 and a 30-year at T+110. Our credit rating is two notches higher than the rating agencies' based on our favorable view of the outlook for the auto industry combined with strong growth expected in the building efficiency segment (which includes HVAC systems). The bonds appear to have priced slightly cheap to our rating, based on where other diversified industrials trade, and rich to the rating agencies. They are also somewhat rich to the Morningstar A index. Nonetheless, with our narrow economic moat and medium fair value uncertainty ratings, we would be comfortable buying these bonds relative to other diversified industrials.
For the complete article.
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