August Fixed Income Market Update
August highlights from the fixed income markets:
- Treasury yields finished the month higher across all but the short end of the curve. Yields hit year-to-date highs mid-month before moving a bit lower at the end of the month in light pre-holiday trading.
- As rates moved generally higher, the Bloomberg U.S. Aggregate Index (the Agg) returned -0.64% in August, its fourth consecutive monthly loss. Nonetheless, the Agg’s return remains positive year-to-date, and each of its major subsectors also remains in positive territory.
- After investment grade (IG) corporate bond spreads hit their tightest levels of the year last month, spreads widened across every IG sector in August. In the high yield (HY) space, spread moves varied. The most significant moves wider came from the HY Transportation sector, while the most dramatic tightening came from HY Energy bonds.
- The high yield default rate improved slightly for a second consecutive month after having deteriorated for each of the first six months of 2023.
Read on for more details and analysis.
Market Summary
Results were mixed in August for the broad fixed income market segments, with only HY corporate bonds producing positive returns.
U.S. Treasury Market
Treasury returns were negative across all but the short end of the curve. Year-to-date returns on 30-year Treasuries turned negative.
Broad Investment Grade
The Agg posted its fourth consecutive monthly loss in August, although year-to-date returns remain positive. Long corporates posted a large negative return but outperformed similar-duration Treasuries. All subsectors are hanging on to year-to-date gains.
Spreads tightened on corporate bonds and widened on current-coupon mortgage-backed securities.
On an absolute return basis, lower quality outperformed versus higher quality in the IG corporate space. Relative to Treasuries, the opposite was true, as AAAs and AAs outperformed As and BBBs.
Corporate bonds spreads widened across the IG sector landscape in somewhat uniform fashion.
High Yield
Absolute returns in high yield favored the lower-rated categories, both in absolute terms and relative to Treasuries. Year-to-date returns in HY remain among the highest in the entire fixed income landscape.
High yield corporate spread movements were mixed. The most significant moves wider came from the Transportation sector, while the most dramatic tightening was in Energy bonds.
The number of high yield issuers to have defaulted in the past 12 months dropped by 1, improving the default rate slightly for a second consecutive month.
Municipals & Other
Municipal bond returns were negative in August, with short duration munis outperforming long duration. Yields moved wider across all maturities and ratings segments.
Leveraged loans posted positive returns in August. Convertibles were an underperformer vs. most other fixed income sectors, although year-to-date returns on convertibles remain strong.
This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of the Segall Bryant & Hamill Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. All opinions expressed in this material are solely the opinions of Segall Bryant & Hamill. You should not treat any opinion expressed as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager’s opinions. The opinions expressed are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this material does not constitute financial, legal, tax or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager’s statements and opinions are subject to change without notice, and Segall Bryant & Hamill is not under any obligation to update or correct any information provided in this material.
1 Source: Bloomberg.
2 Source: Bank of America Merrill Lynch.
3 Hypothetical yields are calculated as the AA municipal yield divided by (1-tax rate). Actual tax-adjusted yields will depend on individual tax circumstances.
4 Source: Standard & Poor’s.
