A Mixed Bag as Signs of Spring Emerge
April highlights from the fixed income markets:
- Returns were strong across most of the fixed income landscape. Treasury returns were positive, and both investment grade (IG) and high yield (HY) corporate bonds posted gains in both absolute and excess (relative to similar-duration Treasuries) terms.
- Although Treasury yields moved higher on the short end (reflecting an expectation of another Federal Reserve (Fed) rate hike in early May), further out the Treasury curve, yield movements were mixed, with no dramatic changes.
- There were several areas of weakness and sources of concern to note:
- The fallout from regional bank distress and its impact on future Fed actions.
- Mortgage-backed securities (MBS). The MBS weakness was due, in part, to the large book of securities expected to be sold by the Federal Deposit Insurance Corporation (FDIC) as a result of the takeover of several failed regional banks.
- Municipal bonds, an area which has been a market stalwart.
- The high yield default rate reached an 18-month high.
Read on for more details and analysis from April.
Fixed income returns were broadly positive in April. Treasuries and corporate bonds—both high yield and investment grade—produced positive returns, while municipal bonds lost ground. All broad categories are positive year-to-date.
U.S. Treasury Market
Treasury yield movements were mixed in April. Yields on short T-Bills rose, while yields were roughly flat to slightly lower across the rest of the curve. Short rates were impacted mainly by a widely expected rate hike at the Fed’s meeting in early May.
Treasury returns were positive across the full curve, with the strongest performance coming in the 5- to 10-year area.
Broad Investment Grade
Every sub-component of the Bloomberg U.S. Aggregate Index was positive in April, with all but mortgage-backed securities (MBS) outperforming similar-duration Treasuries. Intermediate corporate bonds had the strongest absolute and excess returns.
Corporate bond spreads tightened in April. MBS spreads widened over continued uncertainty around FDIC sales from failed banks’ securities books.
Returns were strong across all IG ratings categories, both in absolute and excess terms.
Spread moves on IG bonds were muted. The Communications, Basic Industry, and Financials sectors continue to trade the widest among IG sectors, while Consumer Cyclicals and Capital Goods trade the tightest.
High yield returns were strong in April in both absolute and excess terms, led by the riskiest CCC category. Spread moves favored risk in April, with CCCs outperforming BBs and Bs. Year-to-date, CCCs are also the strongest performer.
High yield sector spreads were mixed. HY Communications bond spreads widened the most in April, while Financials tightened the most.
The number of high yield issuers to have defaulted in the past year rose by 3 in April, driving the overall default rate to an 18-month high. This rate remains below the long-term average.
Municipals & Other
Municipal bond returns were negative in April, most notably in the short duration bucket. Municipal yields moved higher across virtually all ratings categories and maturities.
Preferred stocks and leveraged loans performed well in April, while emerging market government bonds and U.S. convertibles generated losses.
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.