Fixed Income Thoughts

The Treasury market has anchored its short term yields for the next 12-18 months.  At the last FOMC meeting, on Aug 9-10th, Chairman Bernanke issued a warning that Fed-influenced short term rates would remain at 0-.25% into the middle of 2013.  This should keep T Bills yielding less than 5 basis points, with more days where short Bills yield a negative yield.  Two-year Treasury yields should stay anchored at .15-.20%.  If yields drop to zero percent for the 2-year Treasury in 6 months, the total return ( price return + coupon return ) will be an incredibly low .77%.  If rates rise by 20 basis points in 6 months, the total return will be a negative .40%.  Five-year Treasury yields should be anchored at .50-1.00%.  A 25 basis points drop in yield of the 5-year Treasury in 6 months will deliver a total return of 3.03%.  If rates rise 25 basis points, the increase in rates will deliver a negative total return of 1.33% for the same period.  The yield of the 10-year Treasury is a different matter.  Rates are not necessarily anchored at current levels.  If the economy continues to show no marginal growth, and if the  employment report for the month of September shows another zero increase or something similar in jobs creation, expect the yield on the 10-year to hit 1.50%.  A 25 basis point drop in the yield of the 10-year Treasury in 6 months will deliver a total return of 6.30%.  A rise of 25 basis points will deliver investors a negative return of 2.28%.  Can the yield of the 10-year Treasury increase 25 basis points in 6 months ?  Absolutely, from nothing other  than just trading in a range of 2.25% and 1.75%.   September 9, 2011

The yield on the 2-year Treasury has set new lows at .17%.  The yield on the 5-year Treasury is comfortably below 1.00%.  The yield on the 10-year Treasury traded briefly below 2.00% and has since risen back to a retest of the 2.05% yield set in December of  2008.  Investment grade corporate spreads have widening to 12-month highs.  High yield corporate spreads have also widened to 12-month highs.  Both domestic and international credit default swap spreads have widened to 12-month highs.  The S&P 500 is down  15% the past 2 months. Maybe Congress and Bernanke will get the message ... it is time to stop the jaw-boning about ideologies and start real and significant progress on strategy.  The U.S. Government has been downgraded twice ... once by Standard & Poor's and once by the FOMC when it downgraded the economy.  The 10-year Treasury could easy move to a 1.75% yield.  The yield on the 5-year Treasury could easily move to a .50% yield.  And municipal bonds will continue to get their alpha-ratings adjusted lower, but without any collateral damage to the principal and without any significant interruptions to their coupon payments.  August 22, 2011Current Trends Of The Market