Returns on Risk Assets Heat Up in July
July highlights from the fixed income markets:
- The Bloomberg U.S. Aggregate Index (the Agg) returned -0.07%. Following the pause in June, the Federal Reserve (Fed) raised its benchmark overnight interest rate by 25 basis points (bps) at its July meeting. As a result, T-Bills reached their highest yield since early 2000.
- Spreads moved tighter across nearly every corporate sector in both investment grade (IG) and high yield (HY), as corporate spreads reached their tightest levels since early 2022. Spread tightening was most pronounced in the Energy and Financials sectors. The weakest performing sub-category in the Agg was Treasuries.
- Risk assets generally performed well, as HY corporate bonds posted strong returns, and IG corporates were led by BBBs, the lowest-rated category in IG.
- The high yield default rate improved slightly, interrupting what had been a steady march higher for most of the past year.
Read on for more details and analysis from July.
Market Summary
High yield corporates enjoyed a risk-on month, with investment grade corporates and municipals also posting gains.
U.S. Treasury Market
Treasury yields moved higher across most of the curve. T-Bills hit their highest yield since 2000 after the Fed approved another rate hike at its July meeting.
Returns were positive for shorter-dated Treasuries and negative further out the curve.
Broad Investment Grade
The Agg was essentially flat for the month, giving up 7 bps. Treasuries were the weakest sub-category, while the top sub-sectors were asset-backed securities and intermediate corporates.
Spreads moved tighter on both corporates and mortgage-backed securities. Corporate spreads hit their tightest levels since early 2022.
Returns on investment grade corporates were strongest in lower-rated categories, both in absolute terms and relative to Treasuries.
Investment grade sector spreads tightened across the board in July, led by Energy and Financials.
High Yield
High yield corporate bonds also favored risk in July, as spread movement and monthly returns were led by the CCC category. High yield spreads also hit their tightest levels since early 2022.
High yield spreads tightened in every sector other than Basic Industry (raw materials, metals, chemicals, etc.). Spreads in the Energy and Financials sectors tightened the most.
The high yield default rate improved slightly in July while remaining higher year-to-date.
Municipals & Other
Municipal bonds posted gains in July. Yield changes on munis were mixed across ratings and maturities.
Emerging market bonds and U.S. Convertibles both realized strong gains in July. Returns on Convertibles and Leveraged Loans have been particularly robust year-to-date.
Learn more about SBH’s Fixed Income Strategies.
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.