Credit Market ETFs: Improving Data Buoy Bonds; Municipal Bonds Remain Troubling

12/28/2010 Share 0 comments

Sentiment in the credit market was lifted by encouraging economic data last week, but volume was low ahead of the holidays. Fixed-income driven portfolios (such as MyPlanIQ’s Momentum Bond Fund) started to stabilize in the second half of this year due to improving trends.

We make the following observations about last week's development:

• High-yield bonds (JNK) remained at the top spot thanks to shrinking risk premiums over government debt.
• International Inflation-Protected Bonds (WPI) continued to do well as inflation remains as a major concern in many developing countries.
• Investment-grade bonds (LQD) had a very thin trading volume last week, but investment-grade market has had a good run in 2010 on improving yields and corporate credit conditions. The trend is likely continue into 2011 given corporate earnings are expected to start stay strong.
• Emerging Market Debt (PCY) strengthened as growth is expected stay strong in emerging economies. Anchoring inflation expectation remains as a challenge as capital flow may put further inflationary pressures in these economies. Monetary policy and interest rate changes will be in focus in the near term in China and Brazil. This may cast a cloud over the equity markets.
• All medium to long-term U.S. government securities’ yields (TLH) (TLT) rose. This is expected as improving consumer spending data bolstered speculation that the economic recovery is gaining traction.
• Following the recent trend we have seen in the municipal bond market, the outlook for munis (MUB) (CMF) (NYF) remains tepid – states' fiscal problems may worsen in 2011 and put pressure on the Federal government to bail out struggling states to avoid defaults.

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