Research and Strategy

Our Latest Research

Bond Market Focus
Better Off Ignoring the Insurance?^SM
7/21/2008
Having followed the monoline insurer crisis through the cycle, one thing has become extremely apparent; the value of municipal bond insurance has declined significantly. This will come as no surprise to most investors. Municipal bonds have felt several shocks over the past 12-months, as crisis at the monoline bond insurers has sent percentage of Treasury levels to multiyear high levels at times. Meanwhile, the use of bond insurance has waned in a major way as concerns about the insurers’ credit quality persist, reducing insured share of the new issue market to 23% in 2008 from 48% last year. In fact, GKST Municipal Credit Research publishes a helpful scorecard tracking monoline rating changes. Our analysts have been very busy updating this sheet. Most recently, Moody’s and S&P stripped Ambac and MBIA of their coveted triple-A ratings as Ambac was downgraded to Aa3/AA and MBIA to A2/AA. With just 2 established triple-A insurers left, the downgrades put continued pressure on the market for insured bonds and left us wrestling to find value in this transitioning market.

Bond Market Outlook
July 2008

Inflation continued to rear its ugly head in June as 2-year Treasury yields whipsawed higher by 50bps mid-month, only to finish the month down 2bps. The 10-year Treasury moved in a similar, albeit less violent, fashion, ending the month 9bps lower in yield. The 2-year and 10-year Treasuries ended the month yielding 2.62% and 3.97%, respectively.
Federal Reserve President Ben Bernanke has Jean-Claude Trichet to thank for much of the volatility in rates and downward pressure on the dollar, as Trichet, President of the European Central Bank, signaled and then began down the road toward higher European rates with a recent .25% rate hike due to inflationary concerns.
The price of oil surpassed $140 per barrel in June, sparking increased energy concerns and declining auto sales.
Near-term inflation expectations, as measured by the University of Michigan, recently increased to 5.1%, yet longer-term expectations remain better contained.
Non-farm payrolls showed a 62k contraction in the jobs market in June. Averaging a 73k loss in 2008, this important jobs figure’s contraction marks a negative experience for all six months of 2008.
The unemployment rate jumped 0.5% in May to 5.5%, marking the swiftest increase in unemployment in 20 years. We find it worthy to note that over the last 50 years the Federal Reserve has virtually never raised rates while unemployment was rising.
Although housing prices continued in a sharp decline in June, home sales have begun to bottom out and even turn higher as buyers begin to find attractive valuations. We expect both trends to persist in the coming months.
We have long held the belief that asset price devaluation in a recessionary economy, due primarily to the housing market implosion, would outweigh the inflationary impacts of commodity price pressures. We continue to hold this conclusion.
In the agency sector, we recommend investing in intermediate maturity callables with short lockouts due to high volatility levels.
Although the market underperformed in June, we believe investors will support mortgages going forward and continue to recommend a coupon barbell for portfolio positioning.
The back up in muni yields can, at least partially, be attributed to the series of bond insurer downgrades that occurred during the month. Most notably, Moody’s and S&P stripped Ambac and MBIA of their coveted triple-A ratings. We recommend moving down the muni credit spectrum where appropriate. In a high quality play, we currently see value in Texas PSF paper.

Fixed Income Bulletin
February 2008

Economic Calendar

Weekly Economic Calendar
7/18/2008
This proprietary macro-economic calendar allows investors to visually picture short-term market trends and aberrations from consensus expectations. The bottom section takes a long-term look at key economic releases.

Market Monitor

Comparative Analysis
07/25/2008

Cross Market Curves
07/25/2008

Cross Market Curves-Banks
07/25/2008