- March turned out to be quite an event filled month - unlike any other that I have witnessed in my ~ 22 years in the business. In sum, the events (a few details below) resulted in a strong performance for Treasuries as the flight-to-quality theme continued. We also witnessed phenomenal yield swings in 3-month T-Bills. At one interval during intra-day trading on March 20th, the yield touched 0.38% - the lowest level seen since Eisenhower was in The White House. As the month wound to a close though, some investors came to realize that Bills were simply too overbought. After starting the month at 1.83%, then trading down to 0.38%, the yield was pushed back up to close out March at 1.31%. Taking a broader view of the Treasury market, it was volatile but certainly more muted compared to the action in T-Bills. The 10-year yield traded as high as 3.70% and as low as 3.28% before closing at 3.41%. The total return was 1.08% for the month and the YTD return now stands at an enviable 5.75%.
- The forced de-leveraging of certain investment strategies and its impact on the credit markets (taxable bonds/spread product) resembles William Tecumseh Sherman's 1864 March to the Sea said one fund manager. The process and sentiment prevalent during the month was the equivalent of the burning and destroying of almost anything in the way. Credit spreads over Treasuries widened to levels last seen in 2002 when fraud and telecom overcapacity were the big concerns. This time around though, it is happening without a major default. The spreads on everything from agency MBS, investment grade bonds, high yield and bank loan debt widened out to the point where there would almost have to be a long and protracted recession to merit the spread levels some of these securities were trading at.
With this environment as the backdrop, Chairman Bernanke and the Fed found themselves with their backs up against the proverbial wall. The Fed acted quickly and decisively to "save" Bear Stearns, a firm that has been around since 1923. More literally though, the Fed saved the Street. Bear is (was) a significant player in the prime broker, mortgage and CDS market. Had they been allowed to fail it would have been a tidal wave ready to swamp the beach and all the financial institutions and counter parties standing on it. On one hand the speed with which events unfolded was amazing. On the other hand, we're told this was seen coming since two of their hedge funds collapsed last summer.
I'm convinced that the Bear rescue story will be in future text books and it will be passionately debated as to whether or not the Fed and Chairman Bernanke should have instead allowed Bear to fail. In the end, the price, both psychologically and monetarily, would simply have been too high. If you think the markets are frozen now, just imagine how frosty things would have become had the Fed not acted when and how they did. So now the debate begins to turn. Presidential candidates claim the government is doing everything to save Wall Street but nothing to save Main Street. Change is coming to the market and our country in many ways. Stricter regulation, perceived bailouts and tax increases to pay for it all, are very likely outcomes.
- The muni market staged a very nice turnaround in March but the real story in this asset class remains the chaos in the auction rate market. The latest has one state, Massachusetts, issuing subpoenas to three broker/dealer firms whose names keep coming up in complaints to the office of the Secretary of State. The effort is being taken to obtain documents and an insight into practices related to these securities. This was announced the same day that one firm disclosed that they would mark down the value of these securities to reflect their true, suddenly illiquid nature.
While all this unfolds, many issuers of the Muni ARS are, as anticipated, rushing to refinance this debt with more traditional serial structures rather than pay the huge penalty rates that some of the securities are being reset at. As for the preferred shares, the private companies that issue them are coming under enormous pressure to do something to provide liquidity. We have had the chance to hear one of them out and read about others. Our main take-away is that they will not quickly de-lever and buy back the preferred shares because the common (CEF) shareholders would see their income diminish - implying that they would be harmed. My guess is that this will end with lawyers, litigation, regulation and much more scrutiny into how products are profiled to the investing public.
| Lehman
Fixed Income Index Returns Through 3/31/08 |
| Lehman Index |
Duration |
Mar. |
YTD |
2007 |
2006 |
2005 |
2004 |
| US T Bill Index |
0.26 |
0.25 |
% |
0.93 |
% |
5.01 |
% |
4.82 |
% |
3.05 |
% |
1.24 |
% |
| US Treasury Index |
5.30 |
0.69 |
|
4.43 |
|
9.01 |
|
3.08 |
|
2.79 |
|
3.54 |
|
| US TIPS Index |
5.89 |
-0.06 |
|
5.18 |
|
11.63 |
|
0.41 |
|
2.84 |
|
8.46 |
|
| US Aggregate Bond Index |
4.38 |
0.34 |
|
2.17 |
|
6.97 |
|
4.33 |
|
2.43 |
|
4.34 |
|
| US Govt/Credit Index |
5.37 |
-0.01 |
|
2.53 |
|
7.23 |
|
3.78 |
|
2.37 |
|
4.19 |
|
| US Credit Index {A2} |
6.21 |
-0.96 |
|
0.43 |
|
5.11 |
|
4.26 |
|
1.96 |
|
5.24 |
|
| US High Yield Index {B1} |
4.57 |
-0.34 |
|
-3.02 |
|
1.87 |
|
11.85 |
|
2.74 |
|
11.13 |
|
| Caa Component |
4.59 |
-0.06 |
|
-5.75 |
|
-0.13 |
|
17.66 |
|
0.64 |
|
13.80 |
|
| Emerging Market ($$) {BA2} |
6.74 |
-0.20 |
|
0.21 |
|
5.21 |
|
9.96 |
|
12.27 |
|
11.89 |
|
| Municipal Index |
8.04 |
2.86 |
|
-0.61 |
|
3.36 |
|
4.84 |
|
3.51 |
|
4.48 |
|
| Municipal Index - 5 Year |
4.07 |
1.96 |
|
1.93 |
|
5.15 |
|
3.34 |
|
0.95 |
|
2.72 |
|
Christopher Keith
Fixed-Income Manager
|
