Bond Market Endures a Miserable May
Monthly highlights:
The fixed income markets had a lot to contend with in May (see below), and the result was a month in which most sub-sectors produced losses.
The Federal Reserve (Fed) raised the target Fed Funds Rate by a quarter point at its meeting in early May. Futures markets are currently expecting at least one more quarter-point hike by July.
Treasury yields rose across the entire curve.
Spreads on investment grade (IG) bonds moved wider in every sector other than Technology and Finance.
In high yield (HY), the only sectors to realize tighter spreads were Consumer Cyclicals, Transportation, and Capital Goods.
The high yield default rate moved higher at the fastest rate since mid-2020.
In the mortgage sector, the Federal Deposit Insurance Corporation (FDIC) continues its efforts to liquidate securities it assumed in the takeover of several failed regional banks. These actions have pushed spreads on mortgage-backed securities (MBS) wider for the past 2 ½ months.
Read on for more details and analysis of the fixed income markets in May.
Market Summary
Nearly all sub-sectors in fixed income were down in May. Broadly speaking, investment grade corporates were the worst performer for the month. Year-to-date, high yield corporates have posted the best absolute returns.
U.S. Treasury Market
Yields rose across the Treasury curve, most notably on 2-year Treasuries. The 2s to 10s curve inversion reached 77 basis points, the highest since March.
Returns were negative for all Treasury maturities but short T-Bills. Long Treasuries posted the worst returns.
Broad Investment Grade
Every component of the U.S. Aggregate Bond Index produced negative absolute returns, with only Long Corporates underperforming similar-duration Treasuries. Absolute returns remain positive across the board year-to-date.
Spreads rose modestly on corporate bonds. MBS spreads continued to move wider as the FDIC unwinds the securities it assumed following the regional bank failures earlier in the year.
Investment grade (IG) returns were negative for all ratings categories. Only AAAs outperformed similar-duration Treasuries.
Spreads widened across most IG sectors. Only the Technology sector realized tighter spreads.
High Yield
High yield corporates performed better than IG, although all ratings categories posted negative absolute returns. Excess returns were positive across all ratings categories. Spreads rose on BBs but fell on Bs and CCCs.
Spreads widened across most HY sectors, most significantly in the Consumer Non-Cyclical, Energy, and Utilities sectors.
The high yield default rate continues to increase. The number of HY issuers to have defaulted in the past 12 months increased by five, the largest jump since August 2020.
Municipals & Other
Municipal returns were negative in May but are positive year-to-date. The Municipal yield curve remains inverted.
Convertibles were one of the few sub-sectors to post positive returns for the month.
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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.