High Yield Thaws a Bit, but Bond Markets Still Feeling Winter Chill

February Fixed Income Market Update

February’s highlights from the fixed income markets:

  • Yields rose across the Treasury curve in February, with the most significant moves coming in the 2- to 10-year portion. The Treasury yield curve remains inverted. Treasury returns were negative across most of the curve, most notably on the long end. T-Bills, which continue to benefit from the highest Treasury yields and low duration, were the top performer.
  • The Bloomberg U.S. Aggregate Index (the Agg) lost -1.41% for the month and underperformed similar-duration Treasuries. Mortgage-backed securities and long corporate bonds were the weakest sub-components of the Agg.
  • Investment grade (IG) spreads were mixed; long corporate spreads widened, while short and intermediate spreads tightened.
  • In contrast to the IG sector, spreads uniformly tightened in the HY corporate space, leading to better relative performance versus IG corporates and Treasuries.

Read on for more details and analysis.

Market Summary

Treasuries and IG corporates lost ground in February, while HY corporates and municipals were positive.

U.S. Treasury Market

The Treasury yield curve flattened in February. Yields rose across the curve, with the most significant moves coming in the 2- to 10-year portion.

Treasury returns were negative across most of the curve, most notably on the long end. T-Bills, which continue to benefit from the highest Treasury yields and low duration, were the top performer.

Broad Investment Grade

The Agg lost ground in February and underperformed similar-duration Treasuries. Mortgage-backed securities and long corporate bonds were the weakest performers.

IG spreads were mixed; long corporate spreads widened, while short and intermediate spreads tightened. Current coupon mortgage spreads also widened.

IG corporate returns were negative across all ratings categories. Relative to Treasuries, higher quality corporates underperformed.

Spread moves within investment grade corporates were mixed, with no dramatic moves. Communications bonds made the biggest move wider, while Financials tightened the most.

High Yield

High yield returns were positive and weighted toward the riskier ratings categories. BBs underperformed slightly, while CCCs’ performance was strong. Spreads tightened across all HY ratings buckets.

Every high yield sector benefited from tighter spreads in the month. Energy was the strongest sector.

February saw the number of issuers to have defaulted in the past 12 months rise by two. Despite that increase, the default rate has fallen year-to-date.

Municipals & Other

Municipal bonds generated positive returns in the month. Yields rose across nearly all ratings and tenors.

Emerging market bonds had a good month, along with convertibles and leveraged loans.

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.

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