Credit Market ETF Trends: Optimism as European Debt Concerns Fade

12/07/2010 Share 0 comments

Fixed income indices provide important insight into debt market conditions that are key to asset allocation strategies such as our Tactical Asset Allocation. MyPlanIQ uses representative ETFs and tracks detailed weekly bond trend movements. For detailed information, please visit MyPlanIQ 360 Degree Market View.

Government debt with medium to long-term maturities (TLH, TLT) fell in the week ended on 12/3 as the Federal Reserve said the economy strengthened in 10 of its 12 regions with improved hiring, expanded manufacturing figures, and stronger holiday shopping anticipated by retailers. A higher-than-expected unemployment rate and a smaller-than-forecast gain in November payrolls, however, pushed yields on the T-bills (SHV) lower.

Top Three Indicators

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Despite the disappointing unemployment data on Friday, the high-yield bonds (JNK) held up well. Both new-bond issuance and secondary market tone rebounded as concerns stemming from European sovereign debt crisis eased. Investors are gaining confidence that Europe’s debt crisis won’t infect the global economy. Risks remain and investors should remain cautious, however, as cash flow of corporate issuers could fall short with the weak economic recovery, and bonds could come due at the wrong time.

With a struggling labor market, investors are betting that it will help contain inflation. The yields on U.S. Treasury Inflation Protected Securities (TIP) rose and the price registered a weekly loss of 1.2%.On the other hand the inflation report abroad paints a very different picture, with countries like China reaching a 20% food-price inflation in a month and its government rolling out tightening monetary and fiscal policies to curb inflation. The International Inflation Protected (WIP) rose almost 3% last week.

Bottom Three Indicators

Long term treasuries (TLT) fell further as better economic data and easing concerns over euro debt contagion have prompted investors to move away from the safe-haven assets and into risky assets. The Federal Reserve’s $600 billion government bond purchase program had little effect on the long-dated treasuries as the bond-buying program focuses on bonds maturing in three to four years.

The muni market remains fragile with National Muni (MUB) and California Muni (CMF) registering the lowest trend scores in our table. The muni market has been flooded with new issues. States such as California rushed to the taxable market for frantic rounds of fundraising before the federally subsidized Build America Bonds Program runs out at year end. As the extension of this program remains uncertain, we expect to see more states and cities tapping the taxable markets in the next couple of weeks.

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Symbols:AGG,BND,BWX,CIU,CMF,CSJ,EMB,HYG,IEF,JNK,LQD,MBB,MUB,NYF,PCY,PHB,SHV,SHY,TIP,TLH,TLT,WIP,