2Q 2019— Taxable Fixed Income

Jamie Mullen
Senior Portfolio Manager

Fixed income returns continued their robust rally in the second quarter as the 10-year Treasury bond rallied from 2.406% at the end of Q1 to close Q2 at 2.026% according to Bloomberg data. The bond rally resulted in the Bloomberg Barclays U.S. Aggregate Bond Index returning 3.01% for the quarter and the Bloomberg Barclays Intermediate U.S. Corp Intermediate Index up 3.13%.

By the end of the quarter, it was reported that over $13 trillion of global debt was trading at negative yields. Bond markets around the globe appear to be signaling a slowdown in growth or even a flashing the possibility of recessionary forces coming to light. A small 7% correction in equities while they trade close to all-time highs appears to have the Fed concerned about the U.S. economy. The Fed has jawboned the market into believing that they will continue to give support to the market so the expansion from the Great Recession of 2008 can continue.

Returns during the quarter were pervasive and driven largely by:

  • Treasury rally
  • A barbell strategy that improved returns in the longer end of our duration buckets
  • Spread compression in investment grade and high yield bonds

In examining the yields in the U.S. versus global rates, it is a bit astonishing to see the yield levels we trade at. Just when you thought the rally would slow down, Treasury bonds continued their march toward lower yields and corporate bonds yields followed. The market closed the quarter near 2% and a break below, which brings in the prospect of a possible move to 1.5%

We have been proponents of utilizing a barbell strategy and will continue on that path as returns are in line with our benchmarks. A slight inversion on the front end of the yield curve has made for difficult area to invest over 2.5%. The long end of the barbell is benefiting the most from the drive to lower rates. Last quarter, we ended with a question are “lower for longer” interest rates back? It appears so. It was a quick two years of the Fed trying to normalize rates. Debt appears to be deflationary and acting as a tailwind to keep the bond bull market alive and well.

Source: Bloomberg, Ned Davis Research

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Bloomberg Barclays U.S. Aggregate Bond Index: The index is unmanaged and measures the performance of the investment grade, U.S. dollar denominated, fixed-rate taxable bond market, including Treasuries and government-related and corporate securities that have a remaining maturity of at least one year.

The Bloomberg Barclays US Intermediate Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers that have between 1 and up to, but not including, 10 years to maturity.

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