Credit rating cut
Interview: Weiss Peck & Greer---Vandivort, Daniel---Fixed Income Strategist
>> treasury secretary john snow may soon get a deputy, the first woman ever to hold the position. people foo milliar with the matter says susan schwab, the dean of the university of maryland public affairs is a candidate to serve as deputy secretary. the f.b.i. and white house are running background checks before president bush sends a formal nomination to the senate. she previously served as an assistant commerce secretary under the first president bush and motorola executive. she has not had a deputy since taking office in february. he said he would seek a woman with financial markets experience. u.s. treasuries rose in today’s session after connecticut’s credit rating was reduced and california was put on notice its rating may be cut. daniel vandervord is head of fixed income at dwight and drur drury. are we going to see a lot more of this sort of thing, state debt being put at risk, the states are having a terrible terrible time.
>> it is inevitable. you’ve had a slowdown in growth and people think about it what it means for fed policy, very clearly tax revenue growth has come down dramatically. we’ve definitely seen pressure on ratings and it’s likely to increase, but i wouldn’t say we are terribly worried there is some big wave coming of negative news.
>> let’s talk about the treasury market specifically. we saw the 10-year, if yield on the 10-year notarize from the 45 year low of, like, 3.07 back in june. now 3.94. some are saying it could go to 4.5 by the end of the year. is that in the cards?
>> we are not in that camp. i think you have to understand part of the reason the market reacted as it did is you went from a expectation that the fed would lower rates 50 basis points and they overnight did 25. disappointment on that front certainly you had longley qui tags. the reality is we are in a very low inflation environment right now. or inflation is running 1.%. there is really little reason for the fed to think about raising rates over if next six to nine months. if the funds rate is going to be at 1% it’s hard to envision how the curve can steepen that dramatically.
>> you are not in the camp of those who think we have a bubble% -pin the trour market not at all. think we are fundamentallists in the economy, we are below trend growth here, low inflation environment. there are reasons why we are where we are. i don’t doubt that we could get a little more back maybe 3&3/4 on the 10-year. maybe four. but i don’t think you’ll see a shift in the bond market between now and the end of the year.
>> talk to us about corporates. it’s a hot market for corporate debt for obvious reasons because rates are so low. isn’t the bulk of new corporate debt refinanced debt?
>> some of it is. there is clearly debt being issued for other reasons. g.m.’s issue that came out earlier a week or so ago was basically to fund their pension liabilities and so forth. so some of it is refinancing, some of it is being used for other purposes.
>> good opportunities there still for investors?
>> you have some but it’s more limited now than what you had back in the beginning of the year and the fall.
>> help us with that. what would you avoid, what would you approach?
>> one of the things we did over the short run is got involved in the auto sector. auto sector has dramatically underperformed over the last month or so because of the fact of this big g.m. issuance that took place, so there is an opportunity there we think for a little more upside relative to the rest of the corporate bond market. i’d say in general we are getting a little more nervous about credit markets as a whole right now.
>> in a bond fund that puts you in a bad corner, doesn’t it?
>> no, not necessarily. it’s all a relative performance type of game. i think what we’ve done is really shifting, bringing down our credit exposure and corporate bond exposure and
