Drew O'Neil discusses fixed income market conditions and offers insight for bond investors.
We are just over two-thirds of the way through 2020 and given the wild ride it has been, this week I will highlight the ground we have covered and some of the more notable numbers and statistics so far this year.
- Treasury yields have moved lower across the curve. Strong demand for safety combined with the Fed’s actions has pushed Treasury prices higher (yields lower). The 1-year has gone from 1.58% on Jan. 1st to 0.13%. The 5-year from 1.69% to 0.30%, the 10-year from 1.92% to 0.72%, and the 30-year from 2.39% to 1.46%.
- Most of the Treasury movement occurred in the first three months of the year. Since April, the 2-year has traded in a range of 0.10% to 0.20%, the 10-year has mostly traded in the range of 0.60% to 0.80%, and the 30-year has mostly remained in the 1.15% to 1.50% range There was a brief point in early June where 10- and 30-year yields spiked outside of this range before quickly retreating.
- The lower bound of the Fed Funds rate started the year at 1.50% and by mid-March had been lowered to 0.00%, where it remains today and per FOMC estimates will remain through at least 2022.
- The Fed’s balance sheet was about $4.17 trillion at beginning of the year, it had increased by $3 trillion by mid-June to $7.17 trillion and has since decreased slightly down to $7.01 trillion. To put this in context, the previous peak was just over $4.5 trillion in early 2015.
- Year-to-date investment-grade corporate bond issuance has already set an annual record and there are still four months to go. The low interest rate environment has enticed high-grade borrowers to borrow $1.381 trillion so far this year.
- Municipal bond issuance year-to-date is $279 billion, an increase of 21% over this point last year. Issuance of taxable municipals has increased dramatically, from $23.5 billion at this point last year to $81.3 billion so far this year, an increase of 245%. source: sifma.org
- Since the start of the year, the 30-year AAA municipal bond yield has fallen from 2.07% to 1.58%, the 10-year from 1.45% to 0.80%, and the 1-year from 1.02% to 0.13%.
- Money market yields can vary by fund, but the generic money market yield index on Bloomberg was at 1.50% at the start of 2020 and has fallen to 0.10%. Over that same timeframe, total assets in money market funds have increased from $3.6 trillion to just under $4.5 trillion.
- Investment-grade corporate bond spreads are slightly wider than at the start of the year. The BBB 10-year spread is currently 142 basis points versus 125 on January 1st (it peaked at 337 basis points in mid-March). A-rated 10-year spreads have widened by about the same margin, moving from 75 to 93 basis points.
- Strong demand for fixed income is evidenced by the net fund flows. Taxable bond funds have seen over $190 billion in net inflows YTD. This is including March’s record outflows of $229 billion. Since April, just under $350 billion has been put into taxable bond funds. Municipal bond funds have followed a similar path, with $23.3 billion in net inflows YTD, including outflows of $44 billion in March, and inflows of just under $44 billion since April.
- The moves lower in yield have meant that total returns have been strong for fixed income in 2020. The US aggregate index is up 7.39%, the investment-grade corporate index is up 7.94%, the municipal bond index is 3.24% higher, and the high-yield corporate index is up 1.84%
All data is as of 9/4/20 and was sourced from Bloomberg LP unless otherwise noted.
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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