Bond Market’s Glimpse Into 2009

On Friday, Treasuries posted their first weekly loss since October - even as Middle East tensions pushed yields up again. As the year draws to a close, Treasuries have come out as the clear asset-class winner in 2008.

But they may have reached their peak in popularity when investors rushed to get a 0% yield. The rest of the market hasn’t been so popular. The Dow (^DJI), S&P 500 (^GSPC), and Nasdaq (^IXIC) are all down more than 36% for the year.

Unfortunately, just because Treasuries become less popular doesn’t mean there’s a market uptick in our future. But the bond market does give a glimmer of hope for the New Year.

When investors become less risk averse, the spread between the yields of Treasuries and corporate bonds becomes smaller. The spreads have narrowed, and are almost half what they were months ago. Investors are starting to lend to corporations again.

The market hasn’t responded immediately to this loosening of corporate credit. But it has started moving back into preferred stocks. In fact, since November 20, the iShares S&P US Preferred Stock Index ETF (PFF) has gained over 33%.

But if you look closer at the index’s makeup, it’s almost 87% financials: Wells Fargo & Company (WFC), Citigroup (C) and USB Capital (USB) are the top three holdings.

Time will tell if the financials will be the catalyst to bring the market out of the crisis they helped create. But as preferred shares gain in value, an increase in common stock prices shouldn’t be too far behind in 2009.

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