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Back to the New Normal in Fixed Income

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For the first few of weeks of September, both the bond and stock markets were acting like all was well in the world. Better than expected economic reports early in the month triggered a strong (but brief) stock market rally, driving investors out of government bonds and temporarily halting the 6-month old Treasury rally.

But during the second half of September, following comments by Fed Chairman Ben Bernanke, the Treasury rally resumed, returning the markets to the new normal. In what is becoming a familiar pattern, Bernanke revived fears of a double dip recession when he reaffirmed the Fed’s plan to buy additional Treasury bonds, a step intended to boost the flagging recovery by keeping long term interest rates low and injecting liquidity into the financial system.

Treasury yields started falling in the days leading up to the announcement, and they continued to decline throughout the second half of the month as investors purchased Treasuries ahead of the Fed’s buying activity.

Meanwhile, retail fixed income trading mimicked the mood on Wall Street. Trade volumes dropped during the second half of September as individual investors shied away from the low rate environment.

In general, the market metrics at the end of September looked similar to or slightly worse than what we saw in August. Corporate yields fell continuously throughout the month from a high of 4.72% on 9/1 to a low of 4.51% on 9/30. Spreads also tightened during the month, falling from a peak of 2.35% on 9/1 to 2.18% on 9/30. (Of course both figures are good news for corporate borrowers and investors currently holding bonds, but bad news for investors looking to buy new fixed income securities.)

Likewise, following the Treasury curve’s brief rise during mid-September, it ended the month almost exactly where it began. The 30-year bond started the month at 3.66%, climbed all the way to 3.88% on 9/15, but fell back to the new normal at 3.69% on 9/30.

The best opportunities for corporate investment remain in the financial sector, which continues to pay about 140 bps more for a five-year, “A” bond than an industrial or utility bond of the same rating/maturity. Financials also continue to dominate the market in terms of liquidity – over 54% of all investor buy trades in September were financial bonds. And of course the Top 20 list of most actively traded issuers (both buys and sells) was dominated by financial firms.

For more detailed information about retail trading activity in the corporate bond market, be sure to check out our monthly Market Transparency Report, posted on


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