| 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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Corporate Bonds Are Feeling Strain |
THE WALL STREET JOURNAL - MAY 17, 2010 - By Mark Gongloff
The U.S. corporate-bond market is picking itself up after being flattened again by Europe's debt debacle. But it may not be back to the races.
Bond prices rebounded last week from their selloff the week before. Yet they are still well off the year's highs. Bond yields—which move opposite from prices—are still near two-month highs relative to Treasurys.
Across the credit markets, signs of strain linger, despite European leaders' efforts earlier this month to inject calm with a $1 trillion bailout package for troubled countries.
Investors pulled $1.7 billion out of high-yield mutual funds last week, the third-biggest withdrawal on record, according to data from Lipper FMI.
Forty companies sold new bonds last week, most of them investment-grade, compared with an average 57 a week in April, according to Dealogic. They raised about $15 billion, up from $3 billion the week before but below the $20 billion, on average, raised weekly this year.
The U.S. bond market recovered fairly quickly from the first flare-up of European debt problems earlier this year. But the latest surge of anxiety is another reminder of the risks posed by mountains of public and private debt around the world.
Many investors question whether bond prices and yields are compensating them well enough for those risks, particularly given the remarkable, nearly uninterrupted rally bonds have enjoyed from their lows in late 2008.
"We're reading this as the beginning of a re-pricing of risk" in corporate bonds, said James Camp, managing director of fixed income at Eagle Asset Management. "That behooves investors to stay on the risk sidelines."
Signs of weakness in the corporate-bond market come as leveraged buyouts, business spending and hiring are starting to return. If a lull persists, it could tighten a spigot that enabled hundreds of companies to raise more than $900 billion last year—one of the most powerful drivers of the U.S. recovery.
The ripples of concern have spread further than corporate bonds. A closely watched measure of banks' reluctance to lend, the gap between the London interbank offered rate and overnight indexed swaps, called the Libor-OIS spread, is still the highest since last August.
And demand for U.S. Treasurys, seen as among the safest investments, has sent yields to their lowest levels of the year.
In the stock market, too, worries abound, as evidenced in the 5% decline of the Dow Jones Industrial Average from its high for the year. The Dow did gain 2.3% for last week thanks to Monday's Europe-bailout rally. Stock-market volatility, in recent years a proxy for investor anxiety about credit default, has been more elevated and for longer in this episode than after the Greek flare-up in late January.
The Chicago Board Options Exchange Volatility Index closed Friday at 31.24, having doubled in the past month.
When volatility goes up, "credit investors demand a higher premium to take risk," said Curtis Arledge, chief investment officer for fixed income at BlackRock Inc.
Morgan Stanley credit strategist Riz Hussain recently warned that yields on corporate bonds were disconcertingly low—a sign that investors may not be getting enough return in exchange for the risk of owning the debt of companies. Investment-grade bond yields have been trading around a quarter of a percentage point from their all-time lows, he said.
"Be cautious beyond a short-term bounce" in credit following the Greek crisis, he said.
Retail fund flows, though volatile, are also worth watching. Even before last week's outflows, enthusiasm was waning. So far this year, just $2.3 billion has flowed into high-yield funds, according to Matt Fuller, an analyst at Standard & Poor's Leveraged Commentary & Data Group.
Last year, investors poured $20.6 billion into high-yield funds, the highest since 2003.
Credit bulls see the recent tumble as a buying opportunity. With Federal Reserve interest rates near zero, they see a chance to buy high-yielding assets cheaply. The European debt crisis simply means that central banks in the U.S. and abroad will probably keep short-term rates lower for longer, they say.
"There continues to be an insatiable demand for yield," said Jim Sarni, senior portfolio manager at Payden & Rygel.
Mr. Sarni doubts prices have much further to rise. But he also doubts they will fall, either, meaning bondholders can expect healthy returns this year, even if mainly by "clipping coupon," or drawing interest, on their bonds.
If economic growth accelerates, then that could benefit riskier debt flavors such as high-yield bonds, which have historically gained even in the early stages of Fed tightening cycles, according to Matt Eagan, high-yield portfolio manager at Loomis Sayles.
Many bond investors think economic growth will be sluggish, given the economy's structural problems. That is often a better environment for even risky fixed-income investments like high-yield debt than for stocks, they believe.
"The equity market, after a big run-up, really requires legitimate, substantial growth of 4% or 5%," said Joe Balestrino, fixed-income strategist at Federated Investors in Pittsburgh. "The high-yield market can do well in a 1% to 2% GDP growth world."
Further stock turmoil this year could bring investors back to bond funds of all stripes. "After losing a lot of money twice in one decade, people need some portion of their portfolio to protect wealth," said Mr. Arledge of BlackRock. "There has been a secular shift by an aging population to fixed income."
At the same time, the wealth-protection urge may argue for caution in the bond market. "You can't be out of credit entirely, but less volatile will be industrials and companies with the best fundamental credit quality," said Mr. Camp of Eagle Asset Management. "The yield chasers are the guys that blew themselves up in the past two years."
Write to Mark Gongloff at mark.gongloff@wsj.com
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