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April 29, 2005

Changes in fixed income market, Fri., April 29, 2005, 6:37 AM

The bond yield table at Yahoo Finance shows a rapidly developing picture in the U.S. fixed income market. Lower yields across the board from treasuries, muni's and corporates, shows that the change in bond investor sentiment is more likely caused from assessment of the economy, rather than foreign buying of U.S. bonds.

The T-Bill yields of course are going to continue to rise as the Fed tightens.

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It appears to me " and I am not a bond trader " that risk premium for lower quality corporate credits " see the 20-year AAA to A corporates " is starting to kick in. As I see it, that change might be a reflection (finally) that a slow growth economy might bring some business failures among the weaker business corporations.

But, what I fail to understand is why the yields on corporates are falling even faster than for treasuries.

Then again, my surname is not Gross.

I am fairly certain that a slow growth economy will bring a ratcheting down of PE multiples for equities, which I believe has been happening since January 2 of this year.

Yes, it's a new year, with a capital market picture that is very much different than 2004.

I point out this table because it is one that all traders (and U.S. home-owners with mortgages) should be watching carefully.

Posted by Posted by Bill Cara on April 29, 2005 06:28:07 AM | Category: Bonds

Discourse

Hey Bill,

I think we're going to see an inverted yield curve soon (if not already). That could mean an upcoming bear market.

Tom

Posted by: Sixth World [TypeKey Profile Page] at April 29, 2005 8:25 AM [link]

A likely answer to why the corporates are outperforming treasuries is a bit interesting. If you were to include the lower quality credits (junk and barely investment grade), you would see that the spreads have REALLY widened out. What is going on is that there is a flight to quality (out of risk, into safety). My guess is that corporates are an asset class into themselves, and people are flying from junk to high quality corporates. Hence, the outperformance.

Posted by: Achal at April 29, 2005 1:28 PM [link]