The bond market has had quite a shift since the last Fed meeting. What are the common themes?

• Outperformance of credit, especially high yield.
• Return of the carry trade.
• Tax-free Munis have run.
• Underperformance of Treasuries (longer= worse), and foreign bonds, particularly carry trade currencies like the Yen and Swiss Franc.

The willingness to take risks in fixed income has returned, particularly in the last two weeks. I don’t want to tell you that this is a trend that won’t reverse… it might reverse. Remember that bear market rallies tend to be short and sharp, and that the credit bear market in 2000-2002 had several legs. Leg one may be over for this credit bear market, but that doesn’t mean the credit bear market is over; there are still too many unresolved credit issues in housing, builders and investment banks.

Now, to flesh out the changes, I looked at the total returns on 15 major ETFs in different sectors of the bond market. Here are the returns since 3/19:

• HYG — High yield Corporates + 4.47%
• DBV — Carry trade fund +2.83%
• MUB — National Municipals +1.10%
• LQD — Investment Grade Corporates +0.99%
• FXE — Euro currency Trust +0.29%
• BIL — Treasury Bills -.06% (Negative on T-bills?!)
• AGG — Lehman Aggregate -1.03%
• SHY — Short Treasuries -1.18%
• TIP — TIPS ETF -2.85%
• IEI — 3-7 yr Treasuries -3.41%
• FXF — Swiss Franc Currency Trust -3.44%
• BWX — Intl. Gov’t Bond Fund -3.49%
• IEF — 7-10 yr Treasuries -3.74%
• TLT — 20+ Treasuries – 4.87%
• FXY — Yen Currency Trust -5.30%

What a whipping for safe assets. Perhaps the Fed will be happy that they helped engineer the whacking. Then again, the TED spread is still high, and the change might just be a normal shift in sentiment after the panic leading up to the last FOMC meeting. Interesting to see both the return of the carry trade and credit spreads outperforming the move in Treasuries.

For those that follow my sector recommendations, I would be lightening, but not exiting credit positions in the near term. I’m in the midst of considering my other sector recommendations, and will report on this soon. For more on this topic, refer to:

• Its against my programming to call bottoms (and anything by Accrued Interest)
• RIP Bond Rally 2005-2008
• Signs of Improvement in the Credit Markets
• Debt Investors Show Signs Of Relief

Before I close, one large negative area where there is excess supply: preferred stock of financial companies.? There is a lot floating around from balance sheet repair efforts where they didn’t want to dilute the common.? (That’s the next act.)? I would stay away for now, but keep my eyes on selected floating rate trust preferreds, to leg into on the next leg down.