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November 17, 2010 at 11:21 AM
Between Ireland and Greece, the European Union has its hands full trying to stave off potential disaster for the euro and the union itself. Even as Ireland continues to insist that it is not in need of rescue, Englandhas said it is prepared to come to the rescue. Whether the worst or the best happens, bonds will be in flux. What will that mean for fixed income investors?
Chris Shayne (left), CFA and director at BondDesk Group LLC, said in a phone interview, that it’s probably too soon to tell what the outcome will be. However, the markets’ behavior surrounding the Greek bailout earlier in the year can be compared with their behavior in the Irish dilemma, up to a point.
BondDesk, technology firm based in a Mill Valley, Calif., that operates a fixed income trading platform for financial advisors and also provides fixed income market data, doesn’t “do” predictions, but based on the previous crisis with Greece, Shayne said some parallels can be drawn, since some of the same things could possibly happen this time around.
Around the time the crisis started to heat up, Shayne explained, in mid to late April of 2010, “people started buying U.S. Treasury debt with considerable enthusiasm.” That, he said, brought down yield. “From mid-April to mid-May, the [rate on the] 10-year Treasury fell from approximately 3.8 to 3.2 in about a month.” This drop, he said, was primarily a function of global nervousness and a flight to quality. “Any time there’s trouble in the market, there’s a flight to Treasuries; when that happens, yield goes down and the price goes up,” he pointed out. “This was a key phenomenon around the time of the Greek crisis.”
On the corporate side, he went on, “you’d expect to see the yields going up. But two things happened. First, the corporate markets didn’t respond nearly as quickly; there was no change in spreads or yields for a bit longer than with Treasuries, which showed signs of falling yield a couple of weeks in advance of major activity.”
When corporates finally did react at the beginning of May, he continued, the corporate credit spreads went up—an indication of how concerned people were with risk. BondDesk tracks the median corporate spread for the investor, not for the fund manager, and saw that the corporate markets were slower to react. But when they did, it was with a vengeance: “They jumped around 75 basis points in two weeks,” he recalled. “That was right around the time all the different bailout
packages were being announced. Fear had finally spread into the credit markets on the corporate side.” But because it was coincident with falling treasuries, he explained, “you weren’t seeing a big change in corporate yields.” The yields, composed of the credit spread and the treasury rate, saw one factor offsetting the other.
