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