The Chase for Yield Picks Up

During a conversation today with a friend in the fixed income space I remarked how it feels like the chase for yield has been relentless thus far in 2012.  Maybe it is the increasingly positive (if only marginally) US economic data, or the lack of bad new in the Eurozone.  Either way, the result has been the same – a fairly dramatic demand for yield among fixed income.  Consider the following examples below (certainly not an all-inclusive list):

Munis– Somewhat of a crude/amateur measure, but the iShares Muni Bond fund nonetheless shows the recent rally over the last month.

Non-Agency MBS (As Measured by Synthetic ABX Index) Dead in the water during the 2nd half of 2011, now showing its first pop in months.

Non-Agency MBS #2 -This time a CEF called $JLS which is purely Non-Agency MBS. NAV on these funds are determined by level 2 pricing services which have ticked up notably in recent days.  These services include a certain component of cash market prices.  Large amount of the price appreciation in this CEF is a result of the discount going from ~10% to under 5%.  IMO, many are trying to load up on asset classes such as this.

High Yield – as measured by Markit’s CDX HY index.  Note that spreads haven’t come in a ton.  For reference, last February spreads were under 400bps.

Agency MBS- I wrote a few weeks ago about the massive accumulation of Agency MBS by Banks.  30yr 4% Pools are trading over 105 cents on the dollar – a yield under 3%.  15yr 3% pools are close to 104 cents on the dollar.  Spreads on 15yr MBS have come in from ~140bps a few months back to ~105bps this week.

About the Author

David Schawel, CFA, FSA
Currently work as a fixed income portfolio manager. Spent time in NYC in both investment banking and equity research. Current CFA charterholder.