Corporate Bond Commentary
and Strategy

Q1 2009

After the worst and most volatile year in history for the corporate bond market, the first quarter of 2009 saw slight underperformance on both atotal return basis and as relative to Treasuries.

Underperformance was driven by the financial sector as well as the long end of the curve, both of which significantly underperformed the broader credit index and Treasuries.

After a strong rally in January, concerns that some of the largest commercial banks could be nationalized and uncertainty regarding government policy weighed heavily on financial services' spreads in February and March. This trend reversed as recent details surrounding government programs, including the Term Asset Backed Security Lending Facility (TALF), the Public-Private Investment Program (PPIP), and the Federal Reserve's mortgage and Treasury purchase program, and FASB's recent relaxation of mark-to-market/fair value accounting rules, all have been factors in the recent tightening in credit spreads for financial institutions. This quarter also saw tremendous new issue supply, with $252 billion of gross corporate supply and $191.5 billion of net supply, which is among the largest quarterly net supply figures on record. 75% of this new supply was issued by companies rated A or higher, but we were encouraged by the ability of many BBB-rated companies to come to the market with successful new deals. Most corporate issuance has come at reasonable concessions to secondary paper, which has weighed on spreads in the secondary market while presenting attractive opportunities in the primary market.

Investment Opportunities

Going forward, we continue to favor the short end of the curve as we believe there will be continued volatility in credit spreads and see potential risk in interest rates further down the line. We also remain cautious on the financial sector, as we believe performance in that space will continue to be reliant on government policy, which we believe could have unanticipated outcomes. We continue to see opportunities in short dated, out of favor, BBB corporate credit where we can find high yielding (7%-12% range) issues of corporations with excellent near term liquidity profiles. We also believe there are ample opportunities in the new issue market, where investors can take advantage of attractive spread concessions in highly rated industrial corporations and taxable municipalities with excellent operating and liquidity profiles.

Disclaimer: Any opinions quoted are for information only and do not constitute investment advice or recommendation to any reader to buy or sell investments.