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Any Confidence in Corporate America could send Corporate Bond Prices Higher

Interest-Rates / US Bonds Dec 15, 2008 - 08:53 PM GMT

By: Paul_J_Nolte

Interest-Rates Cars – from the musical group to songs about various models (Little Deuce Coupe, Pink Cadillac) to songs about the road (Route 66, King of the Road) it is little wonder the market was captivated by the death dance in Washington regarding the auto companies. When it looked as though they would crash and burn, the markets indicated a 4-5% decline coming into Friday, only a willingness by the White House and the Treasury to use money earmarked for the financial sector, did the markets turn slightly higher on the week.

While no closer to an auto deal, the coming week will also be highlighted by a Fed trying to keep the economy from falling into the abyss. Expectations are for a halving of the Fed Funds rate to 0.5%. Instead of looking for any bright spots in the economy (housing is getting worse at slower rate!) analysts are leap-frogging each other to put out the worst projections for economic or corporate earnings growth rates. We are in the worst part of the economic reporting cycle and the numbers will definitely be ugly through much of the first quarter, it is time to be looking for glimmers of hope on the horizon. Just maybe they haven't yet paved paradise and put up a parking lot!

For the fourth straight week, the markets have traded with a higher low than the prior week. Although not much to brag about, it is something that hasn't happened all year. The repairing of the huge decline in the markets is only beginning and will likely mean a few visits to the recent lows sometime during the coming year before they we wave good-bye to the 750-800 level on the SP500. There are small signs that volume has been improving during market rallies than the declines and overall momentum has improved slightly over the past couple of weeks. This week will mark the last full trading week of the year, with the Christmas and New Year holiday breaking up the last two weeks. Volume should also dry up as investors square up for the year. We are expecting a positive bias through the remaining weeks, however that is also dependant upon a deal being crafted for the auto sector. The focus on the week will be the comments attached to the interest rate decision by the Fed – it should provide fuel for a big move.

Bond buyers in the 3-month treasury markets are giving money to the government for the honor of buying their debt. Yes, interest rates are actually negative for treasury bills with less than 3 months to maturity. 10-year bond rates are hovering around 2.50%, nearly half of the rate available at the beginning of 2008. Historically, low interest rates pushed investors into riskier assets (stocks), however given the stock market declines; few are willing to dip even a toe into the water. The difference between the “safe” treasury bonds and corporate bonds that are considered high quality (although few and far between) is at historically high levels – meaning that any confidence in Corporate America could send their bond prices higher (and yields lower). At this point buying treasury bonds seems to be a losing proposition and we have begun to eliminate them from portfolios in favor of agency and corporate bonds.

By Paul J. Nolte CFA

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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