After a Fast Start to ‘23, February Hits the Brakes
February’s highlights from the fixed income markets:
- February’s losses in fixed income were essentially a reversal of the gains realized in January.
- Several economic reports, including payroll data, surprised to the upside, and the latest inflation reading was higher than the market had anticipated. Against this backdrop, the market’s expectation for how high the Federal Reserve (Fed) will raise short-term rates jumped by 50 basis points.
- In response, Treasury yields rose across the entire curve. Outside of short T-bills, Treasury returns were negative.
- Every sub-component of the Bloomberg U.S. Aggregate Index (the Agg) posted losses for the month. Long corporates were the weakest category, losing nearly 6%.
- Spreads widened across every investment grade (IG) sector. In contrast, spreads tightened in all but two high yield (HY) sectors (Technology and Energy).
Market Summary
After a strong January in the fixed income markets, February was the opposite, leaving most sub-categories slightly positive year-to-date. High yield gave back some ground in the month but remains the strongest broad category so far this year.
U.S. Treasury Market
Treasury yields moved higher across the curve in February, most notably on the short end.
Returns were positive on T-bills but negative across the rest of the Treasury curve. Long Treasuries gave back much of their January returns but remain positive year-to-date.
Broad Investment Grade
Every sub-component of the Agg was negative in February, including Treasuries, corporates, and mortgage-backed securities (MBS). Relative to Treasuries, only agency-backed MBS and asset-backed securities outperformed.
IG spreads moved wider in the month, as did MBS spreads.
All IG ratings categories were down at least -3% in absolute terms while underperforming duration-matched Treasuries.
Spreads moved wider across every IG sector. Most sector spreads remain slightly inside where they began 2023.
High Yield
HY absolute returns were negative in February, although they held in better than the returns on most other fixed income categories. CCCs were one of the few sub-sectors across fixed income to eke out a gain in the month.
Spreads on most HY sectors moved tighter in February. Only Technology and Energy spreads widened.
The HY default rate moved slightly higher in February. This rate remains low from a historical perspective.
Municipals & Other
Municipal bonds posted losses in February as yields moved higher across all maturities and ratings categories.
Leveraged loans had a strong month in comparison to most fixed income categories.
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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.