2Q 2019 Fixed Income Market Review
Lifted by the risk selloff in May, bonds in June were yet no worse for the wear even as that sell-off reversed (down 6% in the prior month, the MSCI ACWI rallied 6.6% to close the quarter up 3.8%). “An ounce of prevention is worth a pound of cure,” to quote Fed Chair Jay Powell, and it was worth at least 2% to global bond investors in 2Q. Bond yields fell as central banks swept in with further accommodation and stimulus, extending gains from May and bringing the quarterly global aggregate bond return to 3.29% and the year-to-date figure to 5.57%.
While the US (+6.11% as measured by the Bloomberg Barclays US Aggregate Bond Index) is the year-to-date leader in core, the 3.08% quarterly gain modestly trailed ex-US bonds, which rose 3.42% during 2Q. Developed Eurozone sovereigns posted a full 4.33% in June and added 4.49% for the quarter as European Central Bank (ECB) president Mario Draghi argued the ECB’s range of options in counteracting continued economic deterioration. The German yield curve sank further as sovereigns rose over 3% in June alone, while Italian bonds rallied over 560 basis points.
The dollar weakened slightly during the month, paving the way for a +3.11% June return for emerging markets sovereign debt (which, thanks to currency headwinds, was one of very few bond sectors in the red during May).
US Treasury yields sank during the quarter; in May the 10-year yield marked its ninth-largest monthly decline (in percentage terms) in forty years. Among broad indices the current 10-year index is the runaway leader on a trailing 1-year basis, up over 10.3%. While parts of the US yield curve have been inverted since 4Q 2018, May’s shift saw the 10-year slip below the yield on the 3-month T-bill, marking a depth that seemed to command investor attention even as views evolve on the predictive power of this indicator relative to economic recession.
US credit has enjoyed a strong position in recent months, outperforming in equity sell-offs as well as in Fed-driven rallies. The highest-quality (and longest-dated) corporates have posted double-digit returns, surpassing high yield. After months of fretful association with excessive debt-to-GDP figures and diminishing quality, the outsized BBB (just-above-junk) segment has found its footing, outperforming some higher-quality investment-grade as well as high yield. Although it underperformed investment-grade, high yield posted a quarterly return of 2.50% and spreads touched 350 basis points before closing out the quarter at roughly 377 – the 30th percentile relative to index history.
Index Returns – all shown in US dollars
All returns shown trailing 6/30/2019 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The Barclay’s US Aggregate Index, a broad based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The ICE BofAML Emerging Markets Sovereign Bond Index is a subset of The BofA Merrill Lynch World Sovereign Bond Index excluding all securities with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U.S. and Western European countries. The FX G10 includes all Euro members, the U.S., Japan, the U.K., Canada, Australia, New Zealand, Switzerland, Norway, and Sweden.
- The Bloomberg Barclays Global Aggregate Index, which measures global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
- The S&P Global Developed Sovereign Bond index includes local-currency denominated debt publicly issued by governments in their domestic markets.
- S&P Eurozone Developed Sovereign Bond – seeks to measure the performance of Eurozone government bonds.
- The S&P Pan-Europe Developed Sovereign Bond Index is a comprehensive, market-value-weighted index designed to track the performance of local currency-denominated securities publicly issued by Denmark, Norway, Sweden, Switzerland, the U.K. and developed countries in the Eurozone for their domestic markets.
- ICE BofAML Emerging Markets Sovereign Bond – tracks the performance of US dollar (USD) and Euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and Eurobond markets.
- The Bloomberg Barclay’s US Corporate Bond Index (AA), which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
- Bloomberg Barclay’s Global Aggregate Securitized- US Mortgage-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and measures investment grade mortgage backed pass-through securities of GNMA, FNMA, and FHLMC.
- Bloomberg Barclay’s Global Aggregate Securitized- US Asset-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and includes the pass-throughs, bullets, and controlled amortization structures of only the senior class of ABS issues.
- The Blomberg Barclay’s US Floating Rate Notes (<5 Yr) Index, measures the performance of U.S dollar-dominated, investment grade floating rate notes with maturities less than 5 years.
- The Bloomberg Barclay’s Municipal Bond Index, which measures investment grade, tax-exempt bonds with a maturity of at least one year.
- The S&P/ LSTA Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
Key Rates are shown for US Treasurys and London Interbank Offered Rate (LIBOR), the interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market. LIBOR is a key benchmark rate that reflects how much it costs banks to borrow from each other. “Current” refers to the percentage rate as of 6/30/2018, while the rates of change are stated in basis points.
Credit Spreads shown comprise the Option-Adjusted Spread of the indices indicated, versus the US 10-Year Treasury Yield. “Current” refers to the spread as of 6/30/2018, while the rates of change are stated in basis points.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to fixed income markets.
- 2s10s (bps)/ 10 Yr vs 2 Yr Treasury Spread, which measures the difference between yields on 10-Year Treasury Constant Maturity Securities and 2-Year Treasury Constant Maturity Securities.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- Core Consumer Price Index, which measures the consumer price index excluding food and energy prices. Shown as of the prior month-end.
- Breakeven Inflation: 5 Yr %/ bps, which uses 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
- Breakeven Inflation: 10 Yr %/ bps, which uses 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
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This material is proprietary and being provided on a confidential basis, and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an “as is” basis without warranty and does not represent the performance of any specific investment .Some of the information enclosed may represent opinions of WST and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. Past performance is not necessarily indicative of future results. Securities and services are not FDIC or any other government agency insured – Are not bank guaranteed – May lose Value.
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