July Recap: Treasuries Surge, Driving Strong Returns

July highlights from the fixed income markets: 

 

  • Yields fell across the Treasury curve in July as signs of economic weakness became more apparent. The most significant yield moves came in the 2- and 5-year part of the curve.
  • Returns were strong across essentially the entire fixed income landscape. Treasury returns were positive across all maturities, most notably on the long end. The Bloomberg U.S. Aggregate Index (the Agg) gained 2.34%, outperforming similar-duration Treasuries.
  • The strongest absolute returns came from investment grade (IG) corporates, as every major sub-sector produced positive absolute and excess returns for the month. Mortgage-backed securities (MBS) produced the strongest excess returns.
  • Within IG corporates, spread changes were moderate – 3 basis points (bps) or less – in every sector. Conversely, in high yield (HY), corporate bond spreads exhibited more volatility compared to IG spreads. To illustrate, the Communications sector tightened 45 bps, while the Transportation sector widened by 79 bps.

 

Read on for more details and analysis.

 

    Market Summary

    Absolute returns were strong across all major fixed income categories.

      U.S. Treasury Market

      Treasury yields fell across the entire curve, most notably in the 2-year and 5-year portion.

        Returns were strong across the entire Treasury curve, led by the long end.

          Broad Investment Grade

          The Agg gained 2.34% and outperformed similar-duration Treasuries. Mortgage-backed securities (MBS) were the strongest component of the Agg versus similar-duration Treasuries.

            Spread moves were muted in IG corporates; current-coupon MBS spreads tightened significantly.te.

              All IG ratings categories posted positive absolute and excess returns.

                Spread moves were wrapped closely around “unchanged” across IG corporate sectors. Year-to-date spread moves have also been relatively muted.

                  High Yield

                  High yield returns were positive across all ratings categories, with CCCs showing the most strength in both absolute and excess terms. CCCs also led in terms of spread moves, outperforming both Bs and BBs.

                    Communications bonds tightened more than any other HY sector. Transportation bonds widened the most.

                      The high yield default rate improved for a fourth consecutive month.

                        Municipals & Other

                        Municipal bond returns were positive across all duration categories. Yields fell across nearly every tenor and ratings category.

                          Emerging market bonds were positive while underperforming U.S. Treasuries, while global government bonds were the top absolute category and outperformed Treasuries.

                            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.