May has come to a close. It was certainly and interesting month for income investments. Here is the beginning of June Income Investor Dashboard updated with prices as of the close of trading June 1, 2011. As usual the green highlights are for the sectors that became cheaper during the month.
Concerns about a slowing global economy seemed to take center stage in May. Bonds had a great month, stocks sold off modestly, and income investors went searching for yield in the traditional high yield sectors making them more expensive. The notable exception was the MLP sector which became almost 7% less expensive during the month. MLPs are back to trading at their average historical spread to treasuries as shown below. mREIts also became a bit less expensive during the month. Both these sectors look like good relative values.
Other high yield sectors became more expensive during the month. The following chart shows the spread to treasuries for corporate bonds and high yield bonds.
A surprising new finding for me during the month was how expensive regular REITs have become (not mortgage REITs). See the chart below which compares the yield for US REITs vs the S&P500 going back to 1997.
Wow! Despite some great fundamentals for certain REIT sectors like apartment, medical property,and industrial REITs it seems a lot of good news is already priced in. Just as with high yield and corporate bonds the easy money seems to have been made.
The biggest development for the month for me was the 10 year note dipping below 3% again. This despite all the headline concerns over rising interest rates and inflation. The bond market is big and broad and combined with continued strong inflows is sending a very different signal and has been for a while. The data seems to be finally catching up with what bonds have been signaling for a while. Long duration munis seem to be the only bond sector that has not fully participated in this flight to safety. Maybe munis are the new junk bonds. They certainly are trading that way.
In short it seems the risk trades are being taken off the table. Stocks are coming off a bit and bonds are rallying. June should be an interesting month.