Treasuries Led Taxables In Feb. Amid Sequester Fears


The caution flag flew in February for taxable bond investors. Jitters about the U.S. budget deadlock and the prospect of sequester -- across-the-board federal spending cuts -- were the main cause.

Italy's chaotic election aftermath -- no parliament, no president -- also fueled investor unease.

As a result, U.S. investors sought their traditional safe haven. Treasury funds' 0.84% gain on average in February led taxables, according to preliminary Lipper Inc. data.

Riskier categories lagged. International income funds lost 1.39%. Emerging markets debt funds lost 0.14%. World income funds, including those that can invest in the U.S., fell 0.50%.

"Most taxable returns were based on the move in Treasuries," said Charles Burge, senior manager of $588 million Invesco Core Plus Bond Fund . "I was expecting a better month than we got."

Many bond investors feared a tsunami-scale stampede out of fixed income into stocks, Burge said.

The yield curve flattened as many investors sought the safety of longer-term Treasuries, bidding up their prices and driving down yield. The yield on two-year notes fell 2 basis points to 0.25% as the yield on 10-year Treasuries fell 14 basis points to 1.88%.

"Retreating into Treasuries is puzzling when you look at the fact that there's potentially a downgrade in U.S. credit," Burge said.

Then again, the last time the U.S. got downgraded, Treasuries rallied. "Treasuries are still viewed as the safest haven and the most liquid," Burge said.

He expects risk appetite to return to taxables as soon as the budget impasse is resolved. In the meantime, he said he is shopping for quality spread assets, such as investment-grade corporates, that provide yield and opportunities for price gains.

Last month he owned a Comcast 4.25% coupon, 20-year bond, rated BBB+ by Fitch -- low investment grade. Its 4.42% yield at the start of the month was 126 basis points more than the 30-year Treasury's. The spread was down to 104 basis points by month-end.

Its 20-year maturity filled a gap in his portfolio. And Burge sees it as high quality. "In tough times, people pay their cable bills before they pay their mortgages," he said.

Moxy In Munis

Investors in tax-exempts showed a little more moxy than investors in taxables.

Municipal bond investors pursued yield, often taking on risk to do so, said Alex Grant, manager of RS' $494 million Tax-Exempt and $264 million High Income Municipal Bond funds.

Intermediate muni debt funds averaged a 0.37% gain in February. High-yield muni debt funds gained 0.34%.

Grant bought Miami-Dade County aviation revenue bonds, with an AA rating by Moody's, on Feb. 1 priced at 112.80 and a yield of 3.42%, which was 108 basis points above the MMD AAA scale. By month-end the spread had tightened to 87. The price rose to 114.30. "Meanwhile, the MMD went down," he said.

Grant says the future depends on how soon Congress and the White House end the budget impasse. "A lot of investors backed off," he said. "They don't know whether tax-exempt status will remain intact."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

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