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Cincinnati Asset Management, Inc.
2008 2nd Quarter Bond Market Review
Corporate and High Yield Bond Allocations Valuable during Bear Market Environments
In our last Newsletter, we considered the performance of High Yield Bonds, Stocks and Hedge Funds during Recession and Recovery Environments and determined that High Yield Bonds outperformed the other categories and had positive returns during recession as well as recovery. In this issue, we comment on the value of fixed income allocation, including high yield, to portfolios during bear markets. During the second quarter, the S&P 500 was off 2.73% and for the 12-months, the decline was 11.92%. The respective returns for the Lehman US Corporate Index were -0.69% and +2.95%, while the High Yield Index was +1.53% and -3.48%. So both investment grade corporate bonds and high yield bonds ameliorated the losses in an equity-only portfolio. From October 07 through June 08, a portfolio consisting of 70% stocks and 30% bonds would have fallen just 9% (Morningstar), while the S&P 500 fell 17.3%. Moreover, during the last two bear markets, both fixed income categories provided value as presented in the following table (Sources: S&P; Lehman Family of Indices):
|
Bear Market Period |
S&P 500 |
US Credit Index |
US High Yield Index |
|
3/24/00-9/21/01 |
-36.77% |
+18.02% |
+2.85% |
|
1/4/02-7/23/02 |
-31.97% |
+2.57% |
-9.00% |
Current Events & Important Factors
|
|
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
|
best |
HY |
HY |
HY |
BL |
HY |
HY |
HY |
IGC |
HY |
USG |
IGC |
USG |
HY |
HY |
BL |
HY |
|
|
IGC |
MB |
MB |
MM |
MB |
BL |
MB |
USG |
MM |
MB |
USG |
IGC |
IGC |
BL |
MB |
BL |
|
|
USG |
IGC |
BL |
IGC |
IGC |
MM |
USG |
MB |
BL |
IGC |
MB |
MB |
MB |
IGC |
IGC |
MB |
|
|
MB |
BL |
IGC |
HY |
USG |
MB |
IGC |
BL |
IGC |
MM |
MM |
MM |
USG |
MB |
HY |
IGC |
|
|
MM |
USG |
USG |
USG |
BL |
IGC |
BL |
MM |
USG |
BL |
BL |
BL |
BL |
USG |
MM |
MM |
|
worst |
BL |
MM |
MM |
MB |
MM |
USG |
MM |
HY |
MB |
HY |
HY |
HY |
MM |
MM |
USG |
USG |
|
Yields to Maturity** and Current Yields on 12/31/06 |
YTM |
CY |
|
CAM Broad Market Strategy (6.9 year maturity) |
6.19% |
6.25% |
|
CAM Investment Grade Strategy (7.0 year maturity) |
5.57% |
5.53% |
|
CAM High-Yield Strategy (6.5 year maturity) |
7.20% |
7.65% |
|
CAM Short Duration Strategy (3.6 year maturity, 50% HY) |
6.09% |
6.48% |
|
Muni Bond (7yr 3.74% before 40% tax equivalent + retail markup 3 pts)+ |
5.40% |
5.40%* |
|
U.S. Treasury (7-year maturity)+ |
4.70% |
4.70%* |
|
U.S. Treasury (5-year maturity)+ |
4.69% |
4.69%* |
|
3-Month Treasury Bill+ |
5.01% |
5.01%* |
* Corporate/High Yield Bond Allocation prove valuable during Q2 and are valuable during bear markets
* Are Treasuries worth holding?
* Corporates and High Yield provide acceptable returns during inflationary environment
* A and BBB-rated corporates and better quality high yield bonds enjoy wider spreads than long term averages.
* FED continues to support financial sector, maintains funds rate, signals concern regarding inflation
* Credit environment continues tight
*
2-5 Year Treasuries impacted most by flattening of yield curve, supporting the philosophy of maintaining an intermediate term portfolio|
Yields to Maturity * & Current Yields on 9/30/07 |
YTM |
CY |
|
CAM Broad Market Strategy (6.8 year maturity; 5.1 duration) |
6.40% |
6.24% |
|
CAM Investment Grade Strategy (7.3 year maturity; 5.8 duration) |
5.73 |