Fixed Income Takes a Breather After Four-Month Win Streak
October highlights from the fixed income markets:
- Yields rose across all but the shortest part of the Treasury curve in October. The most significant yield moves came in the five-year part of the curve. Rates had fallen steadily in the prior four months as the market anticipated a cut by the Fed. When the cut actually occurred late in September, rates began to rise.
- Once the Fed began to ease, investor concerns over the strength of the economy, the government’s financing needs, inflationary pressures, and the upcoming election rose to the fore, causing investors to temper their enthusiasm.
- The decline in markets was the first in several months. The Bloomberg U.S. Aggregate Index (the Agg) lost 2.5%, outperforming similar-duration Treasuries by three basis points. Mortgage-backed securities were the weakest performer relative to Treasuries.
- Investment grade (IG) corporate spreads tightened by single digits across every sub-sector and are very near their year-to-date tightest levels. High yield (HY) sector spreads tightened across every sector other than Capital Goods and Utilities.
Read on for more details and analysis.
Market Summary
All the major fixed income categories lost ground in October. Treasuries and IG corporates were the worst-performing areas.
U.S. Treasury Market
Treasury yields rose across all but the shortest end of the curve.
Returns were negative for all but the shortest Treasuries. T-Bill yields have fallen for four consecutive months but remain high versus most of the past two decades.
Broad Investment Grade
The Agg had its worst month of returns since April. Every sub-segment was negative in absolute terms. Relative to Treasuries, mortgage-backed securities were the weakest performer, which drove a slight loss for the index versus similar-duration Treasuries.
Investment grade corporate spreads tightened across all maturity categories. Spreads ended the month very near their year-to-date tight levels.
Absolute returns were negative across all IG ratings categories. AAAs were the only category to underperform similar-duration Treasuries.
Spread moves in IG sectors were fairly uniform, tightening by 3 to 8 bps across the board.
High Yield
High yield returns were negative, albeit less so than most fixed income categories. Spreads tightened across all HY ratings categories, most significantly on CCCs, and all HY ratings categories outperformed similar-duration Treasuries.
Spread movements in HY sub-sectors were more varied than IG, although most sectors did realize tighter spreads on the month. Communications sector spreads tightened the most, while Capital Goods spreads widened the most.
The high yield default rate changed minimally in October, due to a change in the denominator (number of HY issuers).
Municipals & Other
Municipal bond returns were negative in October but remain positive year-to-date. Yields rose across all tenors and ratings categories.
Emerging market bonds and leveraged loans both performed well in October, posting positive returns.
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.
