Buyers jump into corporate and muni bonds after Fed move

The Federal Reserve’s move to zero on its benchmark short-term interest rate on Tuesday was the equivalent of trying to dynamite the credit crunch, to reopen routes for money to flow.

It’s definitely having that effect: Some investors are rushing into parts of the credit markets where they wouldn’t venture even a week ago.

"The process by which investors seek alternatives to cash has begun ... prodding investors to move out the risk spectrum" in search of higher yields, said Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.

That is showing up in heavy buying of exchange-traded corporate bond funds, for example.

The share price of the iShares iBoxx Investment Grade Corporate Bond Fund (ticker symbol: LQD), an ETF that holds $6.2 billion of high-quality corporate debt, jumped $2.37, or 2.4%, to $100.22 on Thursday. The fund is up 6.1% in the last three sessions, after rising 2.8% for all of November.

In the junk bond sector, shares of the SPDR Barclays Capital High Yield Bond ETF (ticker: JNK) rose $1.11, or nearly 4%, to $29 on Thursday. The fund is up 7.4% from its low set a week ago.

Yields on junk securities remain sky-high, but have pulled back a bit as the bonds’ prices have rallied. The average yield on an index of 100 junk bonds tracked by KDP Investment Advisors was 16.49% on Thursday, down from 17.12% on Wednesday and down from an 18-year high of 17.70% a week ago.

Treasury bond yields also continue to slide, after the Fed said that the sinking economy was "likely to warrant exceptionally low levels [of short-term rates] for some time." The central bank also said it might buy Treasuries for its own portfolio, to keep downward pressure on longer-term interest rates.

For now, the Fed's jawboning seems to be enough: The 10-year T-note yield dropped to a new generational low of 2.07% Thursday from 2.19% on Wednesday and 2.57% a week ago.

But it’s the pullback in corporate bond yields that will encourage the central bank, with the economy still starved for credit.

The question is whether the buyers of corporate bonds this week are investors looking to lock in yields, or just speculators chasing a short-term momentum trade. With the economy still sinking, you’ve got to have guts -- and real patience -- to be taking more risk in the bond market, particularly in junk securities.

Some investors who are hunting for yield are rightly focusing on tax-free municipal bonds rather than taxable corporate issues, with muni yields still historically high.

The tax-free yield on a Bond Buyer index of 40 long-term muni bonds was at 6.16%, on Thursday, down from 6.60% on Monday, as buyers have jumped back into the market.

"Munis are where so much of retail fixed-income money has gone" recently, said Kevin Giddis, head of fixed-income sales at brokerage Morgan Keegan Inc. in Memphis.

But the muni market, too, is heading for a bumpy ride in 2009, as state and local finances continue to deteriorate (just look at California's budget mess).

Bond yields are tempting, but like I said -- any investor moving into the market now had better have guts and patience.

-- Tom Petruno

Photo: The Fed still has a lot of work to do to reopen the money highway. Credit: Los Angeles Times

Comments

[Michael Snyder]

What is the fascination with repeating ineffective action? Why can't these Bozos (apologizes to the clown) learn from recent history? I don't think anyone of them (Bernanke, Bush & Paulson) were saddled with a California education, but they sure are acting like a bunch of drop-outs.

Lowering interest rates has not effected anything but profit margins for the last six months. Lending standards (especially in real estate) have become more Draconian as financial institutions struggle to maintain their cash flow.
Yet the unmitigated arrogance of the Goldman Sachs Alumni continues even as GS trades below its' IPO price.

Can anybody out there see any benefit from the trillion or so dollars this administration has squandered trying to "solve" this crisis? Yes I said trillion. Starting with the this summer's idiocy opening the Fed's discount window to "Investment Banks". Talk about letting the fox in the hen house! Within a month we were in the throws of the biggest commodities bubble in history and analyst at several brokerages were gleefully predicting $200 a barrel oil. But there was still no "money to lend". In a month Bernanke dropped interest rates so far he trashed the dollar on the international market and triggered a global panic, still nobody's writing loans. The only reason the dollar looks relatively good is the sorry shape of the rest of the world's economies. Trust me; is Europe hadn't jumped on the leverage bandwagon the Euro would be at double the dollar and that alone would crash their economy

Which brings us to the bug in the soup bowl; leverage. Lots and lots of leverage. So much leverage that Paulson has "quietly" slipped over $350 billion into his buddies pockets and they're still trying to tunnel out of Bandini Mountain. We all know hot air rises and that's essentially what's been driving the markets. The "Subprime Crisis" was created at the highest levels of management just to support this elaborate Ponzi scheme.

"Over leveraging" requires a constantly increasing cash flow on the back end just to support the interest and viewed from this prospective Wall Street's "finest" have behaved like a teenager with a batch of new credit cards. The Fed gave them "re-fie" and instead of paying off the credit cards, the went out and bought a new Benz. Now Paulson "needs" another $350 billion because he had to use a paltry $17.4 billion to bail out an industry that actually employees a lot of people and actually produces a salable product. "But. but, hot air is a valuable product!" they say. "Only to Madoff's investor's!" I say.

All food chains build from the bottom up and economic chains are no different. When "Joe Sixpack" was thriving so was the rest of America, Now that he's struggling for survival, the very people who put him there are coming to his children with their hands out demanding a "rescue".

These very "experts" will stand behind a podium and declare, "The fundamentals remain strong." and for once they're right. It's their failure to learn and follow those fundamentals that has brought us to this precipice and it will be the careful application of those fundamentals that will lead to our eventual recovery.