Institutional Sales and Trading / Public Finance
2009 proved to be a year of extremes for the fixed income markets. Credit spreads began the year widening dramatically in a continuation of the financial crisis of 2008. However, only months later these spreads experienced the largest drop on record as markets adjusted to the new competitive landscape, the unprecedented government aid programs, and the quantitative easing by the Federal Reserve.
The markets should be less extreme in 2010, but they will likely remain relatively volatile as recovery efforts encounter obstacles (real or perceived) and the controversial issue of government involvement in the financial sector continues to be grappled with in the U.S. and around the world.
Corporate Bond Market
As 2009 comes to an end, there seems to be no recollection of the credit crunch. Spreads across the corporate bond market have all tightened to pre-crash levels, new issuance is at record levels, and the cost for corporate borrowers has fallen to unprecedented lows.
Going forward, we will look for most investors to collect their coupons and not expect significant price appreciation. Corporate bonds will track the stock market and stay firm as along as the economy doesn't double dip and the equity market remains stable.
Municipal Bond Market
In 2009, Mesirow Financial was able to expand our product line, adding Build America Bonds (BABs) to compliment traditional tax-exempt municipal bonds.
In 2010, we expect to see continued issuance of BABs, with a concentration of larger issuers with longer-dated paper. We believe more non-traditional buyers will continue to be attracted to this market for a variety of reasons.
We anticipate a continuation of the BAB program beyond 2010, with the government potentially lowering the subsidy for the issuer (to, for example, 25%). Should this happen, we would expect to see a reallocation of new issuances, with tax-exempt outpacing taxable.
Preferred Stock Market
After the severe decline of preferred stocks in early 2009, the market has recovered to a remarkable extent. The utility and other non-financial markets are trading where they were before the crisis hit, and the financial markets have by and large recovered most of the earlier losses.
For 2010, with a recovery likely to continue, we anticipate that the financial markets will perform well, with higher-rated banks able to return to the open market. Also, if rates continue low for the next few quarters, we are likely to see an increasing number of calls on existing Dividends Received Deduction preferred stocks from utilities.
In the long run, when interest rates rise, the prices of preferred stocks will inevitably decline. However, with the current Fed rate so low, the relative value offered by preferred stocks compared to bonds will continue to buoy the market well into 2010.
Mortgage- and Asset-Backed Market
After two years of being at the epicenter of the financial crisis, this market regained some footing and a sense of direction in 2009. Spreads narrowed dramatically and prudent risk-taking was rewarded handsomely.
2010 should see a continued gradual progress, as the economy improves and the housing market continues to work off the excesses of the recent past and becomes a more stable driver of sustainable activity.
