Baird Advisors Fixed Income Market Commentary for February 2010

February 2010 

Treasury Yields Unchanged | Greece Trap | Modest Returns                                            


Treasury Yields Unchanged
After fluctuating by as much as 25 bps during the month, Treasury yields finished February essentially unchanged (see chart and table below). Ongoing sovereign risk concerns (viz. Greece) put downward pressure on Treasury yields while hopeful signs of a strengthening recovery (retail sales and manufacturing up, unemployment down) pushed yields upward. Long-term yields edged up slightly resulting in further [modest] steepening in the yield curve. The difference between 2 and 30-year Treasury yields increased to 375 bps on February 28 from 368 bps on January 31 after hitting an all-time high of 385 bps on February 17.
Treasury Yields
Source: Bloomberg

Treasury Yield Curve February 2010 

Maturity

Jan 31, 2010
Feb 28, 2010

Change

1

0.27%

0.29%

0.02

2

0.81%
0.81%

0.00

3

1.35%
1.33%

-0.02

5

2.32%
2.30%

-0.02

10

3.58%
3.61%

 0.03

30

4.49%
4.56%

  0.07

 
Greece Trap

Yield spreads on Greek sovereign issues have widened sharply on market concerns about the country’s ability to service its [onerous] debt as it strives to stimulate its economy (and issue more debt) and still comply with ECB standards. Shown below are spreads over benchmark German issues of 10-year Greek and Spanish issues. Greece’s predicament poses a significant challenge to the European Union overall as member countries work towards a solution that shores up Greece’s financial situation without sparking inflation across the continent and devaluing the Euro (the Euro is down 10% vs. the dollar since early December). Essentially what is being tested is the EU’s resolve to stand unified and guarantee or support the debt of its weaker members. Greece is the weakest of the PIGS (Portugal, Ireland, Greece and Spain), but Spain is much bigger. Based upon the relatively tight spreads on Spain’s debt (see chart below), it appears that the market believes the EU will survive this crisis by providing the necessary support to its member countries in need.

 Sovereign Bond Spreads

 
Modest Returns

Unchanged Treasury yields led to modest returns for nearly all sectors of the bond market in February as yield spreads were steady to marginally wider. Two exceptions were municipals (+0.91%) which rebounded from a weak January and TIPS (-1.16%) which suffered from profit taking by a few large institutional players. Agency MBS (+0.18%) underperformed Treasuries (+0.40%) as spreads widened slightly as did Corporates (+0.36%) and High Yield (+0.17%). Despite a softer tone in February, the bond market is still off to a good start so far in 2010. Please see February and year-to-date returns in the table below.

 
Total Returns of Selected Barclays Capital Indices and Subsectors

Index/Sector

February

YTD

BC Aggregate Index
0.37%
1.91%
BC Gov’t/Credit Index
0.41%
1.91%
BC Int. Gov’t/Credit Index
0.43%
1.83%
BC 1-3 yr. Gov’t/Credit Index
0.23%
1.00%

US Treasury Sector

0.40%
1.98%

Gov’t Agency Sector

0.49%
1.55%
Corporate Sector
0.36%
1.99%
MBS Sector
0.18%
1.51%
ABS Sector
0.48%
2.16%
Municipal Sector
0.97%
1.50%
TIPS
-1.16%
0.43%
High Yield Sector
0.17%
1.44%

Indices and subsectors are unmanaged and an investment cannot be made directly in an index or a sector .