Vice President, Trading and Fixed Income Portfolio Management
Looking back on the first six months of fixed income performance this year reveals a stark tale of two strikingly different quarters. While first quarter performance was dominated by COVID-19-driven fund flows out of risk assets and into the safety of U.S. Treasuries, the second quarter was a story of recovery across the fixed income landscape, largely driven by historic policy support from both central banks and fiscal authorities. While a broad index of U.S. Treasury bonds held its own and was essentially flat during the second quarter, investment grade corporate bonds rebounded from distressed levels to stage their greatest quarterly gain of the last 10 years.
The support programs announced by the Federal Reserve at the end of March and their immediate impact on corporate borrowing cannot be overstated. Companies experiencing or fearful of liquidity constraints because of the economic shutdown now had the central bank in their corner, lowering borrowing costs and even promising to be the buyer of last resort for their corporate debt. This supportive dynamic has led to record corporate debt issuance year-to-date. Corporate borrowers are adding financial flexibility as they evaluate both the pace of recovery and specific effects on their business.
Source: Bloomberg
The heightened volatility across fixed income asset classes around the turn of the quarter allowed us to review our strategic allocations in clients’ taxable bond portfolios. We began the year with an overweight allocation to U.S. Treasuries as we did not view the additional yield, or spread, of corporate bonds to be sufficient compensation for the added credit risk inherent to these securities. As Treasuries became historically expensive, offering record low yields to investors, the relative value and additional yield of corporate bonds became much more attractive. Based on this shift in relative valuations, we executed a pivot intra-quarter selling Treasuries and purchasing corporate bonds with attractive additional yield in a strategic shift from being underweight to now overweight Credit.
The deepest U.S. recession since World War II remains on track to also be the shortest. We have already seen notable rebounds as we work through the early portion of our anticipated checkmark recovery. As we begin this new economic cycle and with continued signs of improvement across the economy, we believe our recent shift to add credit exposure to client portfolios will increase their return profile as well as provide additional income in this current low-rate environment.
Our Takeaways from the Week
Despite the recent increase in daily reported coronavirus cases, the S&P 500 still managed to close +1.75 percent for the week
Mortgage rates continue to fall. Bankrate’s 30-year fixed national average declined again this week to 3.18 percent while their 15-year fixed average declined to 2.71 percent