| 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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| 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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Investors and central banks wait for each other to blink |
FT.com, April 1 2008
UBSs mind-boggling $19bn first-quarter writedown on Tuesday came as news emerged of the radical strategies being discussed at the highest levels of the Financial Stability Forum in Rome to bring a halt to the credit crisis.
Both stories show that the markets for bonds backed by mortgage and other debts are part of a global game of chicken involving central banks on one side and investors with cash to put to work on the other. Who blinks first in this game and, more important, when will have a significant impact on the health of banks, housing markets and potentially the biggest economies of the world.
No investor wants to put money into such debt until these markets look as if they are approaching or, better, have hit the bottom. The chances of losing money straightaway and for a few months to come appear just too great.
Asset-backed bond markets appear to have stabilised and in some cases even adopted a more positive tone in recent days or ever since the US Federal Reserve and even the Bank of England began to drift closer towards policies to support liquidity and therefore prices.
There are even hints that taxpayers in the US could ultimately fund a buyer-of-last-resort effort exactly the kind of action that could draw a line under mortgage-backed bond prices and encourage opportunistic investors at last to move in and begin bargain hunting.
Investors and analysts unsurprisingly believe that such strong action would support markets. If central banks were to start buying directly, or increasing broad financing of mortgage-backed securities, that would definitely help the market, says Giovanni Pini, senior investment analyst at European Credit Management, a specialist fund manager in London.
The market needs somebody to start indicating a benchmark price for some of these assets. If central banks were formally or informally to set prices in the secondary market, then opportunistic investors would start to come in.
Last week there was a welter of measures from the European, US and UK central banks that appear to be moving in this direction, but it is far from certain that they will be sufficient to restore the foundations of mortgage financing and the rest of the securitised debt markets.
We see such operations as being certainly net positive for a secondary market starved of liquidity, says Ganesh Rajendra of Deutsche Bank, referring to the Bank of Englands hints at what it might be prepared to do. [But] taking the US market as an example, we would also caution that such liquidity intervention is not a substitute for renewed demand or risk-taking, and thus not in itself a catalyst for recovery.
Mr Rajendra and his team believe, rather, that it is the strong fall-off in the cost of protecting corporate credit against default particularly among financial companies since the rescue of Bear Stearns that has led to the improved recent tone in some asset-backed securities (ABS) markets. There has been a very high correlation in recent months between the ABS markets and corporate credit spreads, particularly with the financial names, Mr Rajendra says. So the liquidity-enhancing measures and the Bear Stearns bail-out have been important, but perhaps indirectly.
This high correlation is borne out by the shocking performance in both markets over the first quarter of this year.
The cost of credit protection as measured by the iTraxx and CDX indices in Europe and the US hit record highs, according to data from Markit. At the same time, senior AAA-rated structured finance spreads, as an example, widened by more than 100 basis points in the first quarter, more than twice that in the final four months of 2007, according to Deutsche Bank. The problem with improvements for ABS markets, then, is that nobody can say with any confidence that anything really has changed, or that the better mood will last. Analysts at Lehman Brothers wrote in a recent note that the more positive headlines ought to be distinguished from continuing trendlines. They said they saw little possibility that fundamentals which from a risk/reward perspective were very much positive for AAAs would regain pricing power over technicals in European ABS in the near term.
We are concerned that unless there is more meaningful central bank intervention to ease liquidity strains, particularly from the Bank of England, the next move out of the range for AAA prime spreads could be wider as opposed to tighter, they say.
No doubt the passage of time will bring a point at which an equilibrium is struck and real judgments on creditworthiness once more outweigh the selling pressure from over-leveraged and liquidity constrained investors.
It is down to the central banks to decide what balance they can comfortably strike between risks to their economy, the stability of their local financial systems and the moral hazard of bailing out incautious lenders.
So the market still waits to see who will blink first.
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| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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