2Q 2020— Taxable Fixed Income

Jamie Mullen

Senior Portfolio Manager

The Navigator Taxable Fixed Income strategy finished the second quarter slightly outperforming its benchmark. Challenges in the first quarter became tailwinds in the second quarter as the Fed was able to stabilize the markets.

In April, it expanded the size and scope of the Primary Market Corporate Credit Facilities (PMCCF) and the Secondary Market Corporate Credit Facilities (SMCCF) and oversold market conditions from March created the best returns of the quarter. The Bloomberg Intermediate Corporate bond Index gained 4.00% for the month. May followed through with another stellar month with the index returning 1.82%. June tacked on another 1.63% to bring the second quarter to a close.

The quarter appears to be mission accomplished by the Fed. But just for good measure they modified their bond buying program of investment grade credits. Initially companies were supposed to apply to the Fed to have their bonds bought in the secondary market. Companies were fearful of this transparency and did not want to be first in line for what the market might view as sign of financial stress and weakness. The Fed eliminated this requirement and by mid-month were buying small amounts of investment grade corporate bonds.

This resulted in investment grade and high yield issues rallying versus a backdrop of almost nonexistent Treasury yields. The 2-year Treasury yield closed the quarter at a paltry 15 basis points, the 5-year at 28 basis points, the 7-year at 49 basis points, and the 10-year at 65 basis points as the second quarter ended.

Taxable Outlook

The ultra-low interest rates and the Fed’s willingness to support the markets has changed our stance on a barbell approach which we had begun in 2016. We are finding relative value in the 4-6-year part of the curve and 9-10-year part of the curve. The result is our duration is extending out further toward the 5-year range and with a more accommodative Fed, we feel comfortable with that extension.

Housing bonds that we own may experience some volatility if the consumer re-trenches. However, low rates and a possible movement out of the cities to suburbs should keep demand for housing steady. Other areas we like are Technology and some sectors that may benefit from an infrastructure bill that will have both parties’ approval during the summer months.

The first six months of 2020 have proven to be filled with volatility. Since April 9th the Fed’s support of the markets has enabled the VIX to move back to the lows of the quarter. Treasury volatility has also been rather benign over the last 2 months, adding confidence to buyers looking for exposure in fixed income despite the low absolute yields. A summer ahead of increasing Covid cases appears to be in front of us. We also may be in store for a presidential election that proves to be as contentious as anything we have seen before. The Fed has more ammunition as Jerome Powell has said, but the ride may get a little bumpy after a historic rally in the markets in Q2 2020.

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The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.

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 5 Year Municipal Bond Index is a capitalization weighted bond index created by Bloomberg Barclays intended to be representative of major municipal bonds of all quality ratings with an average maturity of approximately five years.

The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in market value of an investment), credit, payment, call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase). . Non-investment grade debt securities (high-yield/junk
bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 year. The 10 year treasury yield is included on the longer end of the yield curve. Many analysts
will use the 10 year yield as the “risk free” rate when valuing the markets or an individual security.

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