Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jeremy Glaser | 08-08-2011 02:23 PM

No Panic in Fixed-Income Market

Morningstar's Dave Sekera doesn't see a repeat of 2008's bond market turmoil, but bonds are pricing in a low- to no-growth scenario for the U.S. economy.

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. As equity markets continue their sell off I'm here today with Dave Sekera, a bond strategist for Morningstar, to see how the fixed-income market is holding up. Dave, thanks for joining me.

Dave Sekera: Jeremy, good to see you again.

Glaser: So what do you see in the bond markets today?

Sekera: Bond markets are definitely selling off today in sympathy with equity markets. The thing that I would note is that we're really not seeing the same kind of what seems like panic selling in the corporate bond market as what we're seeing in the equity markets. So yes, things are wider; we are probably 7 to 10 basis points wider in the Morningstar Corporate Bond Index. High-grade names are not trading off nearly as much, so the real high-quality stuff is probably only 3 to 5 basis points off. The lower quality as you would expect, the stuff that is more economically sensitive, has traded off more. The banks and the financials, specifically the lower-quality banks, are really getting hurt the most today.

Glaser: At least on the fixed-income side, it doesn't look like we have a repeat of 2008 on our hands right now.

Sekera: No, it's definitely not the same type of environment that we saw in 2008. So if you remember the beginning of the credit crisis really kind of started in late spring, early summer that's when the credit market really started getting affected by all the subprime and the subprime selling off. The equity market came down a little bit in sympathy at that point in time, but it really wasn't the same kind of panic selling.

Then in the summer things stabilized for a little while, and then the fall is when the market just really fell out for a corporate credit. That's when people really started getting concerned about credit counterparty risk. That's when the banks really started recognizing a lot of the losses in the subprime space, and the market really on the credit side understood exactly the magnitude and the depth of the problem that they had at that point in time. And then it was the equity market that caught up to the downside.

This time around, the equity market has been down very substantially since last week it's down 6% as you and I are talking today. However, we're not seeing that same kind of fear and panic in the credit market. People are looking at it and saying, yes there is definitely some problems and we can get into kind of the confluence of factors that's all coming together today between the S&P downgrade, economic indicators that we have seen over the past week which have been weaker than expected, and the ongoing sovereign credit crisis. Those factors are all coming to a head. However, we're pricing in slow to low growth in the corporate bond market. And we're pricing in maybe some additional default risk over the next couple of years, but it's not that immediate jump to default risk where people are worried about doing a trade or doing business with another entity that could be bankrupt within months.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article