Feb 29

The Month (Year) In Review

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According to the old saw, “As January goes, so goes the year.”  Let’s hope that is only partially true this year, as shown in the below statistics.

Beginning High Low End % Change (H-L)/Beginning (%)
S&P 500 1446.83 1447.16 1310.5 1378.55 -4.7%               9.4%
10 yr Treasury (%) 3.905 3.905 3.435 3.593 -8.0%             12.0%
3 Month Treasury (%) 3.237 3.249 1.941 1.941 -40.0%             40.4%
TED Spread (bps) 147 147 83 117 -20.1%             43.6%
IG to Treas Spread(bps) 192 226 189 189 -1.6%             19.4%
HY to Treas Spread(bps) 306 410 306 401 30.8%             33.9%
10yr -2yr Spread(bps) 98 150 122 150 53.7%             29.3%

Despite the press’ consistent harping about stock market volatility, the SP500 was only a fraction as volatile (measured by the high minus low for the month divided by the beginning value) as the 3 month T-Bill and the spread between LIBOR and the Bill.  Yes, we can thank the Fed for this, but more likely this was an indication of money moving to the sidelines (cash like instruments) awaiting the right time to reenter…putting further pressure on the Fed.

And, as all fixed income managers know, January was exceedingly volatile in terms of spreads to Treasuries, as the yield curve continued its move toward a more ‘normal’ shape.

So, let’s not take our eyes off the ball.  Significant valuation changes continue to occur in the fixed income markets and some of them are a negative result for insurers (who typically hold ‘spread’ product).  If you didn’t like your manager’s performance in Q4, you may not be too happy about Jan 08 either.

Can investment grade managers truly add risk adjusted value with ‘active management’?  During Q4 and, undoubtedly in January, the jury returned a ‘no’ vote for many.