September was the most eventful and painful month for fixed income investors since the credit crunch began. The financial markets were thrown into turmoil on 15 September after Lehman Brothers failed to find a buyer for its business and the company became the largest bankruptcy in US history. Risk aversion increased significantly within markets that were already troubled and corporate bonds fell significantly.A slew of negative news followed, including the virtual collapse of AIG, forcing the Federal Reserve to bail the insurer with an $85 billion loan. Merrill Lynch was bought by Bank of America amid fears that it could follow Lehman Brothers. Serious concerns remained over the largest former investment banks, Goldman Sachs and Morgan Stanley, although they both received new equity investments while a change in law allowed them to convert into commercial banks and take retail deposits.In the UK, the heightened risk aversion affected HBOS and Bradford & Bingley. The former announced plans to be bought by Lloyds TSB while the latter was partially nationalised although, unlike Northern Rock, the future of its bonds remained uncertain and consequently traded at distressed prices. In such an environment the bond markets ceased to function normally and only sellers were seen.The New Star Fixed Interest Unit Trust held less than 1% of its assets in Lehman and Bradford & Bingley bonds and much of this value disappeared. The iBoxx Sterling Corporates Total Return Index (investment grade) lost nearly 7.5%# during the month and the Merrill Lynch Euro High Yield Total Return Index was down over 10%#. The fund fell 5.6%#.
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