BondDesk Group

Electronic corporate bond markets are suddenly all the rage. Apparently, much of Wall Street now believes that a new, centralized electronic market will be required in coming years to prevent a contraction in liquidity in the $8.1 trillion market for corporate bonds. That's because there's a perfect storm of looming regulatory changes that will increase the capital banks need to support their trading operations, while limiting their ability to trade for their own account.

ecember was a quiet month in the muni markets with no bankruptcies or defaults. Retail demand for individual municipal bonds was relatively strong in December, particularly considering it was the holiday season. Mutual funds had a very strong December, receiving $4.4B in net inflows (according to Investment Company Institute), which was easily the high-water mark for 2011. Median municipal yields fell consistently during December (and prices rose), largely due to the increased demand in the mutual fund market.

December was a relatively calm month on Wall Street, particularly compared to the extreme volatility of 2011. Concerns about Europe surfaced briefly, but by the end of the month all three major U.S. stock indices had recovered their losses. Corporate yields and spreads were essentially flat last month while transaction volumes were down slightly due to the holiday season. Demand for taxable (i.e., corporate) bond funds was moderate during December. According to the Investment Company Institute, mutual funds received $9.3B in net inflows vs. $15.5B during November.

November was an extremely volatile month on Wall Street. Concerns about Europe caused a temporary free fall in the equity market, and later in the month American Airlines filed for bankruptcy. Not surprisingly all the turmoil drove up yields for corporate bonds as concerns about credit risk resurfaced. "A" rated corporates experienced the biggest increase, and we continue to believe that investors looking for yield should consider purchasing those bonds opportunistically. Demand for corporate bonds also increased in November, marking the fifth consecutive month buying activity has gone up.

Once again, the big muni news last month was another high-profile bankruptcy. Jefferson County, Alabama filed for Chapter 9 protection on November 9. Although this was the second consecutive month with a large municipal bankruptcy announcement, the retail markets were unfazed. In fact, November demand increased substantially over October levels, even with the light trading during Thanksgiving week. And municipal mutual funds also had a strong month, pulling in $2.9B in net inflows.

October was the stock market's best month in nearly a decade. As expected, the strong equity rally caused retail corporate bond yields to fall as concerns about credit risk receded. Bonds rated single A experienced the biggest decrease in yields, though yields for triple B bonds remained largely unchanged, providing continued opportunity for investors willing to own lower rated investment grade bonds. The buy/sell ratio increased to 1.9 in October, a modest increase over the 1.8 ratio in September but a material increase over the historical norm of 1.4.

The big muni news last month was that Harrisburg, the capital of Pennsylvania, filed for Chapter 9 bankruptcy protection. But the incident didnt have much impact on the retail markets. In fact, trading activity in October recovered from the ultra low levels of August and September, though it was still a relatively quiet month. Mutual funds had a solid October, receiving $1.8B in net inflows according to the Investment Company Institute.

The equity market turmoil impacted yields for retail corporate bonds as expected, but the effect was not consistent across rating grades. Yields for 2nd tier investment grade (A, BBB) bonds increased substantially, while upper tier (AAA, AA) were largely unchanged. This was a continuation of the trend established in August.

September was another extremely quiet month in the retail market for individual municipal bonds. Median municipal spreads increased in September, continuing a trend that began last month. because Treasury yields fell faster than muni spreads widened. Comparably rated revenue bonds were generally yielding more than their general obligation counterparts, continuing a trend that began in August.

During the first week of the month traders bet big on QE2, purchasing Treasuries with abandon and dropping long term yields. On October 8th, 10-year yields hit a new low for the year, falling all the way down to 2.38%. But for reasons that arent completely clear, things changed in mid-October.