Fixed Income Markets Slog Forward

Turkey Day Leaves Markets Quiet

The holiday-shortened week led to a quiet week for equity markets, with most major indices finishing slightly higher.

Initial reviews of Black Friday sales were mixed, with the National Retail Federation estimating that 141 million people went shopping between Thursday and Sunday. This was up from 139 million the year prior, but average per person spending was down to $407.02 from $423.55. Traders will anxiously await results from “cyber Monday” to see how much slack is picked up by Internet savvy shoppers.

In advance of the holiday shopping season, several notable data reports were released.

Housing data painted a mixed picture, with prices continuing to strengthen but pending sales remaining sluggish. The Case-Shiller 20-city Home Price Index gained 1.0% in September and is up 13.3% in the past year. All 20 cities experienced gains in the month, led by a 1.9% increase in Atlanta.

Source: Standard & Poor’s

Data on pending home sales was less bullish for the economy, falling 0.6% in October. Weakness in pending sales data is largely attributed to the recent increase in mortgage rates dampening demand.

The final piece of data is related to consumers. The Reuters/University of Michigan Consumer Sentiment Index recovered modestly in November, bouncing to 75.1 from 73.2 in October. Consumers’ view of current conditions fell slightly on the month, but that was offset by improvement in the survey of expectations.

Source: Haver Analytics

Fixed Income Markets Slog Forward

The past five years have seen a dramatic influx of investor capital into corporate credit markets. As investors jumped into the market, there is growing concern that credit markets are nearing stretched valuations. Those concerns are likely premature, particularly with central bank intervention in place.

After peaking at more than 20% in late 2008, high yield corporate spreads have moved sharply tighter, recently nearing 5% over comparable Treasuries. Investors were enticed to move into the asset class as it became clear that default scenarios projected by the markets were exaggerated.


On that realization, investors poured enormous amounts of money into fixed income mutual funds and ETFs. Between January 2009 and December 2012, more than $1 trillion flowed into fixed income funds, according to the Investment Company Institute.

However, that trend is beginning to reverse. Through November 20, investors have pulled nearly $55 billion from fixed income funds, as fears about rising rates led to losses over the summer months.

Among the reasons cited for concern is the recent issuance of covenant lite loans. Such loans offer fewer protections to lenders and initially became popular in 2007. After falling out of favor, covenant lite loans are rebounding in a big way, accounting for as much as 50% of issuance this year. It is a concern worth watching, but something that is not yet detrimental to fixed income investors.


The likely scenario is that fixed income securities continue to perform ok next year, but not to the returns experienced in the years following the crisis. Investors are desperately seeking yield with interest rates hovering at historic lows, and the natural move is towards fixed income securities. Longer-term, investors should cautiously watch their fixed income allocations, as interest rates will naturally drift higher, and default rates will follow suit.

The Week Ahead

Traders will digest retail sales figures from the holiday weekend. Several reports are scheduled for release, including the ISM Manufacturing survey, November nonfarm payrolls, new home sales, personal income & outlays, and consumer credit.

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