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Bond Market Commentary

Fixed Income Thoughts

By Doug Drabik
March 30, 2020
  • Volatility continues as uncertainty remains. Investors seek answers, yet so much remains unknown.
  • We reached the end of the shortest bear market ever… it lasted 11 days before snapping back to technically a new bull market (20% retracement from the low).
  • The yield curve has steepened by 20bp between the 2- and 30-year Treasuries since the beginning of the year. This has occurred while the 2 year and 30 year are 131bp and 109bp lower in yield respectively.
  • Only 39bp separate the 2yr-to-10yr Treasuries.
  • With the intermediate to short term yield curve relatively flat and continued uncertainty, investors should consider lowering duration on new money and/or cash flow to better position reinvestment for fixed income allocations when the economic cycle completes its turn.
  • The 10yr AAA Municipal Index (muni yield % of 10yr Treasury) peaked last Monday at 365% and bounced around all week to close at 206% on Friday. This index was at 77% to start the year.
  • The Corporate BBB/Baa to 10yr Treasury spread also peaked Friday at 337bp and dropped to a Friday close of 290bp. Back on January 17th it was at 124bp.
  • The Fed’s balance sheet had dropped to $3.76 trillion on August 28, 2019. Last week it had climbed to $5.25 trillion. This is roughly 24% of the US GDP.
  • Can the economic shutdown become worse than the virus?
  • Lost output to GDP is estimated by experts to be ~3%. Some are estimating the 2nd quarter GDP could be down 20% or more.
  • Upcoming economic releases are anticipated to be down significantly. Initial jobless claims were estimated to climb to 1700k… it was released at 3283k.
  • The Fed has pledged “unlimited” QE. The already ballooned world central banks’ balance sheets are poised to grow even more. This is highly likely to support the idea of low interest rates for a very long time period.
  • The additional stimulus is not likely to stop a recession but will help to soften its effect and improve the recovery.
  • Fed monitor policy has pulled short term Treasury rates inside of 1 year to 12bp or less. Banks tend to be relatively aggressive and offer an insured high quality alternative with CD rates 6 months to 1 year at approximately 0.90% to 1.15%.
  • Investors seeking high-quality, relatively short A-rated corporates will see yields in the 2.00%-3.00% range.
  • Monitor spreads. Higher spreads for corporate and municipal bonds translates to relatively higher yields (vs Treasuries). This may present opportunities for higher yields in high quality fixed income in the short and intermediate parts of the curve.
  • The Treasury curve remains near historic lows and indicates that the economy has challenges. It is not a good time to take on risk.
  • The economy was in good shape prior to the medical crisis. Many banks and corporations had healthy balance sheets capable of absorbing some downturn. Do not overcompensate or panic with relatively healthy holdings. Remember that the fixed income allocation for many investors is in place to protect capital long term.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

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