May Fixed Income Market Update
May highlights from the fixed income markets:
- Yields fell across the Treasury curve in May, with the most significant moves coming in the belly of the yield curve. Treasury returns were strong across all maturities, with particularly strong results on the long end.
- The Bloomberg U.S. Aggregate Index (the Agg) returned 1.70% in May, outperforming similar duration Treasuries. Every major sub sector produced positive absolute and excess returns. Mortgage backed securities (MBS) posted the strongest absolute and excess returns but remain the worst performers year to date.
- Spreads were either flat or moderately tighter across every investment grade (IG) corporate bond sector.
- High yield (HY) corporate bond spreads were mixed. Spreads on bonds within the consumer non cyclicals and utilities sectors tightened the most, while spreads on transportation and communications bonds widened the most. The high yield default rate improved for the second consecutive month.
Read on for more details and analysis.
Market Summary
May was a strong month for Treasuries, Corporates, and nearly all fixed income sub categories. Municipal bonds were among the few sectors to show weakness.
U.S. Treasury Market
Treasury yields fell across the entire curve, most notably in the belly of the curve.
Treasury returns were solid across the curve, especially on the long end.
Broad Investment Grade
The Agg had its strongest month so far in 2024. Duration performed well. Every Agg sub category posted positive returns and outperformed similar duration Treasuries.
Spreads tightened across all IG tenors and on current coupon MBS.
All IG ratings categories had positive absolute returns. Only AAA corporates underperformed similar duration Treasuries. BBBs had the strongest excess returns.
Spreads were flat or tighter for every IG corporate sector. The largest move came in the Financials.
High Yield
High yield returns were skewed toward the higher rated categories. CCCs posted a positive absolute return but underperformed Treasuries.
HY corporate spreads were mixed. Spreads on consumer non cyclicals and utilities sector bonds tightened the most, while spreads on transportation and communications bonds widened the most.
The high yield default rate improved in May and remains low versus historical levels.
Municipals & Other
Muni yields rose across the middle of the curve and fell or were stable on the short and long ends of the yield curve. Performance was negative in all but the long duration category.
All of the “other” fixed income adjacent categories generated positive returns in May. Preferred stocks and convertible bonds were the strongest performers.