Intermediate-Term Bond Rally: Investors Accept Risk in a ZIRP World

In a little over a week, we've seen a nice rally in intermediate-term investment grade corporate bonds (VFICX; pink line), as well as intermediate-term investment grade municipal bonds (VWITX; blue line), as falling interest rates have investors searching for relatively safe yields. During this same period, we've seen dramatic weakness in the U.S. dollar and firmness in gold. With Treasuries offering near-zero interest rates and one-year bank certificates of deposit currently averaging 2.86%, compared with the prior week's 3.22%, the search for yield is gradually taking investors further out on the risk curve--particularly retirees and baby boomers who need to replace the income they had been getting from riskless instruments. As the Fed seems unlikely to unwind its zero interest rate policy (ZIRP) any time soon, I'll be watching for signs of growing risk appetites in credit markets.

Comments

[NOWHEREMAN:]

Why bother, why not just buy the highest yielding Municipal Bond funds available. Helicopter Ben might allow GM to go belly up, but he certainly will not allow the Multi-Trillion dollar Municipal Bond Market go up in flames.

IMO

2008 Dec 23 01:52 PM

[Emerald:]

Yield is available at a small risk in internediate muni's (+3%), interim corporates (+6%) and Ginnie Mae bond funds (+4.6%, avg duration six years). For cash needs, see agency paper in "government" money market funds (+1.4%). MMFunds in Treasuries are a waste given that the Fed basically guarantees agency paper and does guaranty Ginny Mae's. For a little more risk, see closed end bond funds that are selling at 10-20% discounts to NAV and have yields +10% (Blackrock, Pimco, Western Asset, Alliance, etc.) Note: I hold all of the above and no short term Treasuries.

2008 Dec 24 11:25 AM