Third Quarter Recap: Strong Returns Abound as Fed Begins Easing Cycle
Fixed income returns were strong and broad-based across the fixed income landscape in the third quarter. Investors bid up bond prices steadily in anticipation of a widely expected rate cut by the Federal Reserve (Fed), which implemented a 50-basis point cut in September. Economic reports during the quarter showed declining inflation and a slowing job market. This data, coupled with the most recent release of Fed officials’ interest rate projections (the “dot plot”), indicate a likely continuation of rate cuts over the coming quarters.
The Bloomberg U.S. Aggregate Bond Index (the Agg) returned 5.20% for the quarter, one of the strongest quarters in the index’s history, outperforming Treasuries of a similar duration, with every sub-component posting strong returns. Corporate spreads tightened modestly across most sectors, with the exception of Energy and Consumer Cyclicals. In contrast, high yield spreads showed more volatility. BB- and B-rated spreads widened, while CCCs tightened. Individual HY sector performance varied—the Energy sector widened the most while the Communications sector tightened the most. Meanwhile, high-yield defaults remained low by historical measures, improving slightly over the quarter.
Looking ahead, we expect volatility to be high in the 4th quarter. First, the highly contested election in the U.S. comes in November against the backdrop of serious ongoing geopolitical disputes internationally. Second, a vigorous debate continues over the size and pacing of growth in the U.S. economy and, by extension, for further interest rate cuts. The Fed will meet twice, giving investors two opportunities to consider adjustments to their portfolios.
Read on for additional data and details impacting fixed income markets in the third quarter of 2024.
Market Summary
Returns were strong across the fixed income landscape in the third quarter. Investment grade corporate bonds posted the strongest absolute returns.
U.S. Treasury Market
Treasury yields fell across the entire curve. The 2s-10s yield inversion (the excess yield on 2-year Treasuries over 10-year Treasuries) normalized in the quarter after over 2 years of being inverted.
Returns were strong for all Treasury categories, with particular strength coming from long Treasuries. Year-to-date returns have turned positive for all categories.
Broad Investment Grade
Every component of the Agg posted positive absolute and excess (relative to similar-duration Treasuries) returns. Long corporates were the strongest category.
IG spreads tightened across the maturity spectrum. Current-coupon MBS spreads tightened, as well.
Both absolute and excess returns have been strong for all IG ratings categories for the quarter and year-to-date.
Spreads tightened moderately in every sector other than Energy and Consumer Cyclicals, both of which widened just slightly.
High Yield
High yield posted its eighth consecutive quarter of positive absolute returns. CCCs were the top-performing ratings category.
HY sector spreads were quite volatile relative to IG sectors. The Communications sector tightened the most, while Energy sector spreads widened the most.
High yield defaults remain low; the HY default rate improved in the quarter.
Municipals & Other
Municipal bond returns were positive in the quarter, with longer duration Munis outperforming short duration. Yields fell across all ratings and maturity categories.
Returns were positive for emerging market bonds, leveraged loans, preferred stocks and convertibles. Emerging market bonds have been one of the strongest individual sectors in the fixed income landscape year to date.
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.
