Treasury yields rose dramatically in the early part of the second quarter as the market came to the realization that rate cuts from the Federal Reserve (Fed) would take longer than previously expected, due to persistently high inflation and strong labor markets. Economic data released late in the quarter suggested that higher rates were beginning to restrain activity, and yields eased back down as the quarter drew to a close. The result was  moderately higher yields overall for the full quarter and a small positive return on Treasuries, in aggregate. Short-term U.S. Treasuries (T-Bills) continue to benefit from the current rate environment and have returned 2.65% year-to-date, making them one of the top-performing sub-sectors in fixed income, while 30-year Treasuries have lost over 6%.

The Bloomberg U.S. Aggregate Bond Index (the Agg) eked out a 0.07% return for the quarter, moderately underperforming similar-duration Treasuries. Corporate spreads widened marginally across every investment grade (IG) sector and were mixed in high yield (HY), with an overall bias wider. IG corporates posted a small negative absolute return, with BBBs outperforming higher quality corporates. Conversely, HY corporates returned over 1%, with BBs outperforming CCCs. The high yield default rate dropped to its lowest level in over a year.

Futures markets entered 2024 showing an expectation of 5-6 quarter-point rate cuts for the year. As suggested above, current expectations are more in sync with the actual reported pace of the economy and suggest 1-2 cuts before year-end, which will, of course, depend on the strength of the labor market and inflation readings continuing their progress toward the Fed’s 2% target.

Read on for additional data and details impacting fixed income markets in the second quarter of 2024.

Quarterly returns were mixed; high yield corporates were the top-performing major fixed income category, while other categories’ returns were roughly flat.

Treasury yields were essentially unchanged on the extreme short end of the curve while rising further out the curve. Despite the curve steepening, the 2s-10s yield curve inversion (i.e., the excess yield on 2-year Treasuries versus 10-year Treasuries) extended into its 24th consecutive month.

Treasury returns were positive on the short end and negative on the intermediate to long end of the curve, leading to a very slight positive return (10 basis points) in aggregate.

The Agg rallied in May and June to finish the second quarter with a slight absolute gain while underperforming similar-duration Treasuries. Long corporates were the weakest component of the Agg in both absolute and excess terms.

IG corporate spreads widened in the quarter while remaining tighter year-to-date.

Returns were skewed toward lower-rated, lower-duration IG corporates. Only BBBs outperformed Treasuries in the quarter.

Spreads widened by single digits across every IG sector. Financials were the top-performing sector, while bonds in the Capital Goods, Energy and Utility sectors widened the most.

High yield had a solid quarter in aggregate. Returns were positive in both absolute and excess terms for Bs and BBs, while CCCs underperformed Treasuries and posted a slight negative absolute return. Spreads tightened on BBs and widened on Bs and CCCs.

High yield corporate spread moves were mixed. Communications and Transportation sector spreads widened the most, while Technology and Consumer Non-Cyclical spreads tightened the most.

The number of HY issuers to have defaulted in the past 12 months decreased by 9 in the quarter, driving the HY default rate to its lowest level since April 2023.

Municipal bond returns were mixed. Short-and long-duration munisposted positive results, while intermediate munislost ground.

Leveraged loans and emerging market bonds had positive results for the quarter, while global Treasuries and preferred stocks underperformed.