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.