War Room 28 March 2012 Fixed Income in 2012: Are Bonds Still En Vogue?. War Room. Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome. Fixed Income in 2012 – Are Bonds Still En Vogue?. Market Snapshot Fixed Income Fundamentals
War Room 28 March 2012
Fixed Income in 2012:
Are Bonds Still En Vogue?
Fixed Income in 2012 – Are Bonds Still En Vogue?
The New Normal
US Interest Rates at all time low, and pledge from Fed extended – rates will remain here until mid 2014.
Treasuries + Emerging Markets Debt Funds have trounced the S&P 500, without the volatility
Many still haunted by Meredith Whitney comments in October 2010 for no reason
Less volatility since the crisis helps folks sleep better
Even through financial crisis, credit risk not an issue for investment grade – but CCC and below has 57% lifetime default rate.
Still above 30 yr average
Further narrowing = upside for HY, Munis, EM debt
Widening = flight back to treasuries
Credit Risk: HY Credit Spreads
Sources: Citigroup + BofA Merrill Lynch
Hold to maturity
Floating rate issues
Higher yield considerations
Increased credit risk
Higher correlation to stocks
Interest Rate Risk - Duration
Sources: National Associations of Realtors, Home Builders, and Wells Fargo
2003 – Last Recovery
1980 – High Inflation
Avg Yield Curve
2006 - Last Cycle Peak
2011- What's Next?
The current yield curve is significantly lower than historical averages, with seemingly little precedent to drop further.
Bernanke’s worst fear, and the reason for QE
Interest Rates Rise – What is the Driver?
Consequences - Growth:
Fed tightens as we get back to normalcy
2. Borrowing costs rise for financial firms, REITs
Bullish for equities as bonds lose luster
Precious metals not as shiny either
You can also manually enter custom fixed-income or cash-flow investments (including real estate)
How it works:
Interest Rate Risk Modeling: Calculates duration and convexity to model interest rate risk
Credit Risk Modeling: Uses industry/sector or proxy symbol to determine correlations, and uses ratings to determine volatility
Fixed Income Functionality