Taxable Fixed Income Commentary 2Q2010

The risk trade, which had been on for most of 2009 and early 2010, came to an abrupt end in the second quarter. Since the market peak in late April, the S&P 500 has lost close to 200 points or 15% of its value and investment grade credit spreads have widened more than 80 basis points. From an asset class standpoint, bonds were king in the second quarter, with the Barclays Aggregate Index returning 3.5% vs. a -12.5% return for the MSCI World Equity index. In fixed markets flight to quality was the dominant theme, with 10yr Treasury yields falling 87 basis points, the curve flattening and long Treasuries (20+years) netting an impressive 15% return for the quarter. As spreads widened, the credit sector benefited from falling yields, netting a positive return of 3.3%. Low quality credit lagged with flat returns, as spread widening outweighed falling yields in the less interest rate sensitive high yield sector.