Market Recap

The following points summarize the developments in the retail market for corporate bonds last month.

• December was a relatively calm month on Wall Street, particularly compared to the extreme volatility of 2011. Concerns about Europe surfaced briefly, but by month’s end all three major U.S. stock indices had recovered their losses. (Both DJIA & S&P500 actually finished December in positive territory.)

• Corporate yields and spreads were essentially flat last month. Median yields were 4.70% on 12/1 and 4.73%.on 12/30. Spreads moved slightly more – from 3.22% to 3.44% - but the increases were offset by falling Treasury yields.

• As expected, transaction volumes were down slightly in December due to the holiday season. Demand for corporate bonds fell for the first time since July.

• The buy/sell ratio fell to 1.7 in December, a modest decrease from the 1.8 ratio in November.

• 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.

• Treasury yields behaved as expected in December, falling briefly mid-month as the crisis in Europe triggered a temporary increase in demand for Treasuries.

• Financial firms continued to dominate the retail market in terms of yield. The median 5-year, “A” financial bond yielded 4.9%, while the median “A” industrial bond yielded 2.3%.

• Financial firms also dominated the retail market in terms of liquidity. In December, 58% of all retail buy transactions were financials.

• In December the Top 20 most actively traded companies made up over 46% of all investor buy trades, which is a 2% decrease from November.

 

About the Corporate Market Transparency Report

The data and analysis contained in this monthly report are intended to provide transparency into the dynamics of the corporate bond market for retail investors. The report describes the important trends in the market, including trading volumes, most active issuers, yield/spread movements and buy/sell ratios.

Retail trades are typically defined as odd-lot transactions under 100 bonds (i.e., less than $100,000 par value). The retail market is much smaller than the institutional market on a par value basis, but it accounts for roughly 75% of the trades that occur in the marketplace.

Trading Volume

As you can see from the left-hand graph, buying activity was mostly flat during the first part of December before dropping precipitously as the holidays approached. Given that yields were also mostly flat in December, it makes sense that volumes were steady. And of course it also makes sense that volumes dropped substantially during the holidays, as most people do not trade during that time of year.

As the right-hand graph shows, buying activity in December fell for the first time since July. The daily average was 9,108, which is still reasonably strong and higher than the averages from summer. Excluding the last 5 trading days of the year, the average was 9,890 trades per day, which is just below the November mark of 9,972.

As you can see from the left-hand chart, selling activity was also steady in December until the holidays arrived.

But as the right-hand chart shows, on an absolute basis the selling volumes were low relative to the past three years. The average daily volume in December was 5,337, which is the lowest figure since April of 2009 (excluding the past few months, which were also extremely low).

Yields and Spreads

As you can see from the left-hand graph, median corporate yields fluctuated between 4.55% - 4.82% during December, but they finished the month essentially where they started.

As the right-hand chart shows, yields in December were lower than August - November, when the European debt crisis began to peak, but still higher than the levels during the first half of the year.

Spreads were also mostly flat in December, though they briefly dipped and spiked at the very end of the month. The stability makes sense given that the equity market was mostly calm during December.

As you can see from the right-hand chart, the December spreads were lower than the August - November levels but still substantially higher than during the first half of the year.

Investment Grade Yields by Rating

December was the first time in several months that investment grade yields moved consistently across all rating categories.

Since the European debt crisis took center stage in August, yield movements for “A” bonds have been quite volatile, which makes sense because most “A” issuers are financial firms. In December much of the news about Europe was negative but the headlines were not severe enough to roil the markets. As a result, U.S. financial firms with exposure to European sovereign debt were not materially impacted.

In November, on the other hand, concerns about Europe dominated the news, driving up spreads and yields for domestic financial issuers.

Given the fluid nature of “A” yields, BondDesk continues to believe that investors looking for yield should consider purchasing “A” bonds(1) opportunistically. They are not quite as safe as “AA” bonds, but they yield substantially more income relative to the increased risk. And they’re considered safer than “BBB” bonds, though they don’t yield quite as much.

Of course, investors considering any corporate bond investment need to be mindful of their risk tolerance. But with Treasury yields near historic lows (see next section) they may be a viable option for investors looking to boost portfolio returns.

U.S. Treasury Curve

As you can see from the left-hand chart, Treasury yields dropped 30 bps mid-month before recovering briefly and then dipping again. The big move early in December was triggered by a series of negative news reports out of Europe that increased demand for Treasuries.

As the right-hand chart shows, 10-year yields in December were near their lows for the year.

(1) “A Buying Opportunity in Investment Grade Corporate Bonds,” Advisor Perspectives, 9/27/2011. http://www.advisorperspectives.com/newsletters11/A_Buying_Opportunity_in_Investment-Grade_Corporate_Bonds.php

 

Appendix A: Yield Matrix

In this section we display the median yields for municipal bonds in each major agency rating grade and maturity bucket. We have created four different matrices – G.O. tax-exempt, revenue tax-exempt, G.O. taxable, and revenue taxable – because each sector has its own yield behavior. (Note that we post daily yield matrices on www.bonddeskgroup.com.)

Appendix B: Sector Analysis

The pie chart below shows the share of investor buy trades for each of the four sectors defined above. As usual, tax-exempt revenue bonds dominate the trading activity, followed by tax-exempt GOs.

Appendix C: Most Actively Traded States: Investor Buys

The following table shows the states with the most actively purchased tax-exempt G.O. and revenue bonds last month. (NOTE: The data in this table is ranked by total number of tax-exempt municipal investor buy trades in that state.)

 

Appendix D: Most Actively Traded Issuers: Investor Sells

Just as investors tend to concentrate buying activity in a few popular names, selling activity is similarly concentrated.

 

 

Disclosures

This report represents certain customer trades in municipal securities that have been reported by dealers to the Municipal Securities Rulemaking Board ("MSRB"). The report does not necessarily reflect all transactions that were effected on dates noted. There is the possibility of errors or delays in the trade submission process. Prices for transactions vary with market conditions and can be affected by trade size and other factors. The information provided has been obtained from sources deemed to be reliable, however BondDesk Group LLC does not guarantee the accuracy of the information contained in this report.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Defaults on interest payments and/or principal may also occur. Projections, results and assumptions contained herein reflect past performance of the referenced securities and asset classes. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate such that an investment, if and when redeemed, may be worth more or less than its original cost.

This information is intended for general informational purposes only, and should not be used as the sole basis for any investment decisions. None of the information in the report constitutes an offer or solicitation to buy or sell any security or financial product, a recommendation concerning any security, financial product or asset class, or an offer to provide investment advice or any other service. Where advice is appropriate, please consult with a qualified financial or tax professional.

BondDesk Trading LLC, member FINRA and SIPC, is a wholly-owned subsidiary of BondDesk Group LLC.

 

 

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www.bonddeskgroup.com