The Agg Strikes Back: Best Month Since 2008
November’s highlights for the Fixed Income market include:
- As expected, the Federal Reserve (Fed) raised the federal funds rate another 75 basis points in November.
- While Treasury yields rose at the short end of the curve, they fell across the rest of the curve.
- In this environment, the Bloomberg U.S. Aggregate Bond Index (the Agg) rose 3.68% in November with gains across nearly every category of fixed income, most notably in long corporate bonds and mortgage-backed securities (MBS). However, for the year, the Agg is poised to post an all-time record loss.
- Corporate bond spreads tightened across every sector in the investment grade space. In the high yield space, spreads were mixed and the default rate ticked higher while remaining low from a historical perspective.
Market Summary
Returns were strong across essentially the entire fixed income landscape in November, offering a slight respite from a year of steady losses.
U.S. Treasury Market
Treasury yields fell across all but the shortest maturities, which were impacted by another Fed rate hike early in the month.
Treasury returns were positive across all maturities, with duration outperforming.
Broad Investment Grade
The Agg posted its best single-month return since 2008 as every sub-component performed well, led by long corporate bonds and MBS. MBS had its best single monthly return since 1985.
Spreads tightened on investment grade (IG) corporate bonds and MBS.
All IG quality categories posted positive returns in November, both in absolute terms and relative to Treasuries.
Spread tightening was fairly uniform across all IG sectors in November. Financials and Consumer Cyclicals tightened the most, although there was no significant underperformer.
High Yield
High yield returns were positive across all ratings categories for a second consecutive month. Only CCCs posted negative excess (relative to Treasuries) returns in November.
Spread moves in high yield were mixed for the month. Communications bond spreads tightened the most, while Technology spreads widened the most.
The high yield default rate ticked higher in November but remains low versus historical levels.
Municipals & Other
Municipal bond returns were strong in November as yields fell across all maturity and quality categories.
Returns were positive in November across global markets, leveraged loans, preferred stocks, and convertibles. Several of these categories remain deep in the red 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.