Monday, December 22, 2008

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.