First Quarter Recap: Booms, Busts, and Banks
Strong Returns and Volatility Return to the Bond Market
The Bloomberg U.S. Aggregate Bond Index (the Agg) produced a 2.96% return in the quarter, the strongest since the first quarter of 2020. Every sub-component of the Agg posted positive absolute returns, with the weakest areas being anything tied to the banking sector. The banking sector was put into great stress near the end of the quarter by the failure of Silicon Valley Bank (SIVB). While the story continues to unfold, the bank’s failure (and Signature Bank’s concomitant failure) changed the dialogue considerably. Debate about whether there would be two or three more rate increases by the Federal Reserve (Fed) shifted to whether the rapid pace of tightening over the last 12 months was creating collateral damage. Volatility in the Treasury markets returned to levels last seen in 2008. Following the collapse of SIVB, the market’s nerves were calmed by promises from banking executives, politicians, and Fed officials to take extraordinary measures to support the banking system. While the banking panic appears largely contained for now, the market’s expectations around short-term rates has adjusted sharply downward. Futures markets are now pricing in several Fed Funds rate cuts throughout the remainder of 2023, despite historically low unemployment rates and reported inflation well above the targeted 2% level. Investment grade (IG) bond spreads bounced around but ultimately finished relatively flat to where they began. In the high yield (HY) corporate space, spreads moved tighter in most sectors, and HY returns were among the strongest of any fixed income category. The Treasury yield curve remained inverted, prompting many economists to continue calling for a recession sometime in 2023. Corporate earnings season is set to begin in mid-April, and investors will be watching closely for any such recessionary signs. Read on for more analysis and commentary on the fixed income market in the first quarter.
Market Summary
First quarter returns were strong across the major fixed income market segments.
U.S. Treasury Market
Yields were volatile in the quarter across most of the Treasury curve, ultimately finishing lower. T-Bill yields rose following two quarter-point rate hikes from the Fed during the quarter.
Treasury returns were strong across the curve, with long bonds leading the way.
Broad Investment Grade
Every component of the Agg generated positive absolute returns. Corporates had the strongest excess returns, as they outperformed similar-duration Treasuries.
Spreads on corporate bonds moved tighter early in the quarter but ultimately finished wide of where they began. MBS spreads did essentially the same, finishing the quarter one basis point wider.
All investment grade corporate ratings categories posted positive returns on an absolute basis and relative to Treasuries.
Investment grade corporate bond sector spreads were mixed. Communications (media, telecommunications, etc.) tightened the most, while Financials (mainly banks) widened dramatically in the final month of the quarter.
High Yield
High yield corporates performed well in the quarter in both absolute terms and relative to Treasuries. CCCs were the strongest-performing category in both respects. HY spreads widened in March but ended the quarter tighter than where they began.
High yield corporate spreads moved tighter across all but two sectors; only the Financials and Communications sectors realized wider spreads.
The high yield default rate increased slightly for the full quarter while remaining low versus historical levels.
Municipals & Other
Municipal bonds performed well in March to finish the quarter with positive returns across all maturities. Yields fell across all ratings categories.
Returns were positive across all the “Other” bond categories. Global Treasuries and convertibles had the strongest absolute returns in the quarter.
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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.