The Bond Story Remains the Same

BONDS STRATEGIST: The tale continues to be all about the Federal Reserve and its ongoing quantitative easing programme

Dave Sekera, CFA 14 May, 2013 | 5:41PM

Last week was quiet on the news front for bond investors, as earnings season wound down and no significant economic indicators were released. The Morningstar Corporate Bond Index tightened 3 basis points at the beginning of last week and held on to those gains throughout the week, even though the credit default swap market widened towards the end of the week. 

The story continues to be all about the Federal Reserve and its ongoing quantitative easing programme. This asset-purchase programme continues to distort the market's risk/reward dynamics, as interest rates are driven by monetary policy goals from a buyer who is unconcerned about future mark-to-market losses. It's increasingly disconcerting that more and more clients we have spoken with are of the same general sentiment--this will end badly--but they feel as if they have no choice but to play along for now, or they will undertake too much career risk of lagging the indices.

Following the interest rate cuts by the European Central Bank the prior week, the Reserve Bank of Australia cut its interest rate by 25 basis points to a record-low 2.75% last week. The Australian central bank cited its expectations for below-trend growth rates this year and moderating commodity prices in its reasoning to cut its benchmark rate, but we suspect at least some part of the decision is an attempt to devalue the strong Australian dollar. Since November 2010, the Australian central bank has cut its interest rate by 200 basis points. South Korea also cut its benchmark rate last week by 25 basis points to 2.50%, its first interest rate cut since October 2012 and a cumulative decrease of 75 basis points since the Bank of Korea last raised interest rates in June 2011. This action is an attempt to halt the rise of the won versus the yen, as exports account for half of the South Korean economy and have been pressured by the combination of a global economic slowdown and strengthening versus the yen.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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