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Credit Insights

Bondholders Beware

One of the dominant themes this year will be the focus on providing shareholder value, even if it comes at the detriment of bondholders.

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Last week was relatively quiet in the bond market, as secondary trading was muted and new issue volume declined as we entered earnings season. The Morningstar Corporate Bond Index was unchanged for the week at +136 over Treasuries.

Investors complained that they had a hard time sourcing bonds, as demand from mutual funds--which are flush with cash from inflows--outstripped new issue supply and dealer desks were low on inventory. Even in the face of this demand, investors are experiencing a little sticker shock and were unwilling to push credit even tighter. Spreads remain at the tightest levels since the credit crisis.

Fixed-income mutual fund flows in March were generally very strong, with international fixed-income funds experiencing the greatest inflows and investment-grade and high-yield funds benefiting from strong inflows.

Municipal bond funds were the losers once again. They've experienced outflows for five consecutive months, an exodus that began when headlines first appeared reporting the potential for increased municipal default rates this year. Municipal bond funds have experienced $40.2 billion of redemptions since November 2010. On the plus side, the rate of outflows from municipal funds has been consecutively declining since last December. U.S. government bond funds have also experienced a slow bleed in assets, probably because investors are reallocating proceeds to spread products in the search for high yields.

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David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.