Weekly Market Update - August 9

Interest Rate Data Points

Bond Market Commentary

• Money Flows Into Bonds
  Over the last three years US families and businesses have de-levered and re-assessed their risk profile.  Not coincidentally, according to recent US Treasury Department data, US investors own more Treasuries than foreign investors for the first time since 2007.  According to ICI (Investment Company Institute) data, monthly flows into all types of bond mutual funds in 2007 ranged between a monthly outflow of $4 billion and monthly inflows of $21 billion.  In 2010, the lowest total monthly inflow into bond mutual funds was around $12 billion with a monthly high inflow of $37 billion.  Bond investors in all risk segments have been rewarded with positive returns over the last several years.  However, with yields at historic lows and credit spreads much tighter than crisis levels, SNW Asset Management remains cautious with our clients’ money, as the returns earned over the last three years will be more difficult to come by over the next 18 months.
• New Issue Activity
  In a reflection of credit market strength, new issuance across the corporate credit markets is robust.  In July, investment-grade companies priced $80 billion of new supply (the highest monthly total on record) while high-yield issuers priced $20.4 billion (the highest monthly total since 1997).  Companies are taking advantage of low interest rates, healthy balance sheets, and strong investor appetite for yield to complete deals.  At SNW Asset Management, we are continually evaluating these new issues, taking advantage of those that offer attractive returns while also fitting within our clients’ investment objectives.
• Update on Greece
  Last week the IMF announced that Greece has shown “great progress” in implementing austerity measures to reduce its budget deficit and qualify for emergency loans.  The aid package was originally announced in May after investors, concerned with Greece’s budget deficit and rising debt levels, pushed Greece’s borrowing costs to well over 20%.  Greece’s deficit will likely be less than 8.1% of GDP this year, down from 13.6% a year ago.  The message for our investors in US municipal debt is that governments that borrow excessively to fund spending can change their ways but, typically, it takes the force of the markets to get their fiscal house in order.  This process can be very painful to current debt investors.  Until we see evidence that municipal borrowers with large budget deficits are taking the necessary steps to increase tax revenue and reduce spending, we will continue to avoid debt issued by those high-risk borrowers.