June 2020 Fixed Income Markets Review
June was yet another positive month for fixed income assets as the Fed continued to provide liquidity in the corporate bond market and investors looked past the potential for an additional shutdown of the economy due to COVID-19. Corporate credit outperformed treasuries while the Bloomberg Barclays U.S. Aggregate finished the month up 63 bps – pushing the index’s year-to-date total return to 6.14%.
U.S. Treasury yields were little changed for the month, with the Bloomberg Barclays Treasury Index returning 9 bps. As the recent increase in COVID cases could potentially affect the timing of the U.S. economy re-opening, yields remain at historically low levels. As of the end of June, the ten-year yield was only 11 bps higher than its low point in March, which could be a sign that investors are still wary of the economic outlook. However, since late March the five-year breakeven inflation rate has significantly rebounded, with yields now implying 1.17% of annualized inflation over the next five years. While the breakeven rate is still 53 bps lower than it was at the end of 2019, it is evident that investors are looking past the current economic crisis. Still, these rates imply a five-year real yield of approximately -90 bps, hardly an attractive yield for investors who rely on the income and safety of U.S. Treasuries. As we continue to operate in this low interest rate environment, market participants may be pushed further out on the risk curve in order for their fixed income portfolios to generate an acceptable yield.
U.S. corporate credit investors experienced another strong month of performance, with U.S. investment grade and high yield returning 1.96% and 0.98%, respectively. Both sectors saw additional spread tightening in the month of June, albeit much less than we witnessed in April and May. As the Fed continues to provide liquidity to corporate credit markets, one would expect to see further tightening in spreads. Nevertheless, investors remain cautious, particularly in the high yield sector. As of the end of June, the Bloomberg Barclays U.S. High Yield Index was approximately 5% off its February high. Comparing that with the investment grade index – only 68 bps from its March 6th high – seemingly, credit investors still prefer higher quality investments.
A similar observation can be made in the municipal bond market. Since the start of the year, municipal bond investors have shunned lower-quality bonds. Since general obligation bonds are issued from a government with taxing authority, they are typically viewed as higher-quality bonds. For this reason, it is not surprising to see the Bloomberg Barclays Municipal Bond General Obligation Index outperforming the broad municipal index, as well as the high yield municipal and revenue bond indices.
While the economic outlook remains questionable, sustained assistance from the Fed in lending markets and an improvement in investor and consumer confidence should be supportive of fixed income assets across the board.
Index Returns – all shown in US dollars
All returns shown trailing 6/30/2020 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 Treasuries 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 a moving 30-day average of the 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 a moving 30-day average of the 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
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