The 20 Rising Stars of Fixed Income 2008

From Bad to Worse By David Lewis Shrinking corporate bond and securitization issuance, flagging bank lending drain confidence in the fixed-income markets T HE FIXED-INCOME MARKETS today seem as stable as a life raft in a hurricane. Some experts believe the raft should be able to ride out the storm. Others see it sinking and unable to bob back to the surface until sometime in the fairly distant future, when the storm has passed and the sun is shining once again. So far, the major components of the fixed-income markets— the bond markets, bank loans and securitized products— have reacted to market uncertainty mainly by shrinking. Hardest hit, of course, have been mortgage lending and the mortgage-backed securities markets. The Federal Reserve has reported that commercial banks' chargeoffs for all loans and leases jumped to a seasonally adjusted 0.72% in the fourth quarter of 2007, from 0.42% in the fourth quarter of 2006. At the same time, charge-offs for homes loans rose to 0.44% in the fourth quarter of 2007 from 0.12% in the same period the previous year, while charge-offs for commercial real estate loans in the fourth quarter of 2007 rose to 0.35% from 0.08% in the same period the year prior. 6 FIXED INCOME RISING STARS Reported delinquencies showed similar increases, with commercial loan delinquencies rising even faster than home loan payment delays to 2.71% in fourth-quarter 2007 from 1.32% in fourth-quarter 2006. Residential delinquencies rose to 3.09% in the final quarter of 2007 from 1.91% in the same period the year before. Similarly, poor results came out of the residential mortgagebacked securities (RMBS) market. “Needless to say it has been a tough market, particularly for private-label mortgagebacked securities,” said Steven Davidson, vice president of capital market research for the Securities Industry and Financial Markets Association (SIFMA). “That is undoubtedly part of the reason we're seeing more mortgages being purchased, securitized or held in portfolios - to the extent that they are able - by government-sponsored enterprises such as Fannie Mae and Freddie Mac. It’s a way of opening up the market.” Standard & Poor's reported that, as of March 2008, total delinquencies are 35.26%, 35.37% and 26.13% of the current aggregate pool balances for RMBS issues from 2005, 2006, and 2007, respectively. This is an increase of approximately 2% for the 2005 vintage, 4% for 2006 and 7% for 2007 when compared with the February 2008 distribution date. MAY 2008

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The 20 Rising Stars of Fixed Income 2008 Table of Contents From Bad to Worse Another Disappointing Year for Comp How Do You Rate? 20 Rising Stars of Fixed Income Mentors’ Page

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