Transcripts

The Impact of Stimulus Plan on the Bond Market

SUSIE GHARIB: Now that the economic stimulus plan is close to becoming a reality, the next big challenge is how to pay for it. The Federal government will have to issue large amounts of new Treasuries, which makes some in the bond market uneasy. Scott Gurvey takes a look at the outlook for bonds.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Until recently, Treasuries were the bond of choice, safe haven in a time of turmoil. But lately traders have been dumping Treasuries in fear the government will be increasing supply to pay for the stimulus package. Zane Brown of Lord Abbott thinks the traders are wrong.

ZANE BROWN, CHIEF FIXED INCOME STRATEGIST, LORD ABBOTT: We certainly got a good test of that this week. We had a three-year auction, a 10-year auction and a 30-year auction. All of them were well placed. The three year in particular was well over subscribed. And I think that gave us a good indication and some comfort that indeed there will be buyers out there.

GURVEY: For all the talk of the credit crunch, Jerry Webman of Oppenheimer Funds says investors looking for yield will find the corporate bond market is reviving and good returns can be found.

JERRY WEBMAN, DIR. OF FIXED INCOME, OPPENHEIMER FUNDS: Issuance is up over 30 percent from where it was last year. Spreads have narrow considerably, especially in the investment grade realm. So money is actually being lent in the capital markets and the best quality companies are able to access the debt markets and raise money. So it's different from what we're thinking about most parts of the financial world right now.

GURVEY: The outlook is not so rosy for companies without an excellent credit ratings and the high yield market remains dormant. But another area where investors can find good yields with relative safety is muni bonds. Interest on municipals is often exempt from taxation.

BROWN: Municipal bonds offer phenomenal opportunity, especially longer term municipal bonds. It's rare and in fact prior to this past year, we never saw municipal bonds exceed the yield of Treasuries. Typically they were only 80 percent or 85 percent of the yield of Treasuries. Now long municipal bonds are 130 percent of the yield of Treasuries.

GURVEY: The highest rated municipals are usually tax anticipation bonds which have first claim on tax revenue and get paid before other obligations. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.