It was a quarter for the ages in the credit markets.
Yields on 10-year Treasuries hit a record low of 1.38% on July
25, before finishing the quarter at 1.63%. Yields on 30-year
Treasuries also hit an all-time low of 2.4% in July. They closed
at 2.8% on Friday.
General U.S. Treasury funds tracked by Lipper Inc. notched a
0.29% gain as investor anxiety continued to linger in Q3.
General domestic taxable bond funds rose 0.81% in September
and 3.06% in the third quarter, according to preliminary Lipper
Obsession over yields is a trend that some warn could
"A lot of people are engaged in picking up nickels in front of
a steamroller," said Rick Platte, portfolio manager of the Ave
Maria Bond Fund . "It works pretty well until it doesn't work at
all. The small yield that people are getting on Treasuries right
now could all disappear in a hurry with only a small rise in
The Federal Reserve introduced a new round of quantitative
easing in the closing weeks of Q3. It now plans to buy $40
billion worth of mortgage debt each month and keep the federal
funds rate near zero into 2015.
"I hate to see when this program has to be unwound and there
is a massive seller of Treasuries and mortgage-backed
securities," said Joel Buck, co-portfolio manager of the
Nationwide Bond Fund . "I believe the Fed will continue to have a
strong influence on short rates, but its influence over long
rates is diminishing."
Despite the measures to be taken by the Fed to boost the
economy, concerns still loom. "With everything that's being done
on the monetary front, there's probably not anything that can be
done to overtake fiscal policy concerns," said Scott Kimball,
co-portfolio manager of the BMO TCH Core Plus Bond Fund . "Q4 is
probably going to be our last quarter of positive GDP growth for
Kimball believes the bond market is beginning to price in the
economic struggles that may lie ahead. "We have the 10-year
Treasury yield basically equal to our GDP growth," he said.
"Historically, when that has been the case, it is GDP that cracks
-- not interest rates."
Kimball suggests that if tax increases and spending cuts were
to take effect due to congressional gridlock, longer-term yields
could decline even further. "The fiscal cliff could reduce the
supply of Treasuries available to the market," he said. "Rates
for the 15-year-and-out portion of the Treasury curve could go
Fiscal and economic challenges roiled the Spanish bond markets
in Q3 as 10-year yields closed at 6.1% on Friday. "The
instability in Europe is such a wild card," Buck said. "It's
really not something you can take a big bet on."
World income funds do have their moments, though. They gained
1.71% last month, 4.54% in Q3 and 7.74% year to date.
U.S. corporations scrambled to the bond markets to take
advantage of low yields throughout Q3. "We feel investment-grade
U.S. corporations are sitting on piles of cash," Platte said.
"They really don't need the debt."
The $260.5 billion of high-grade corporate issuances during
the quarter eclipsed the previous Q3 record of $256.8 billion set
in 2010. "Supply coming into the new issuance market has been
unprecedented," says Gary Davis, also a co-portfolio manager of
the Nationwide Bond Fund. "Orders for theWatson Pharmaceuticals (
) deal on Thursday were eight times the amount of bonds
Funds with bonds rated BBB rose 0.77% last month and 3.55% in
Q3. High-yield bond funds jumped 1.30% last month and 4.23% in
Municipalities joined corporations in taking advantage of low
rates in Q3.
In Q3, they issued $83.3 billion of long-term bonds. The
figure is 9.3% above the $76.2 billion of issuances that
transpired in Q3 of last year. Year-to-date, long-term municipal
bond issuances have amounted to approximately $278 billion. This
figure is 44% above the total for the comparable period in
Platte notes that although the default rate on general
obligation debt has been historically low, budget strains have
become a growing concern for some municipalities.
Muni funds rose 0.43% last month and 2.13% in Q3.