3Q 2018 — Taxable Fixed Income

Jamie Mullen
Senior Portfolio Manager
Eric Kazatsky
Portfolio Manager

Rates continued to rise during the quarter and the 2 to 10-year spread contracted another 9 basis points to 24 basis points. We have been taking a barbell approach in the portfolio since last year and as of this September, we are seeing the first maturities we invested in roll off and mature. We will reinvest the proceeds in new 1-2 year paper that is 50 to 75 basis points higher than a year ago. As long as the Fed stays on the current course of rate hikes, we believe the barbell strategy remains prudent.

Going into the end of the quarter, high yield bonds reached new highs as the stock market soared and left no strains on liquidity. We maintained our same position in high yield, allocating approximately 15% of our holdings to the sector. We did, however perform some rotation within the high yield space, purchasing some names that, in our opinion, will be less sensitive to interest rate should rates continue to rise.

In investment grade corporate bonds, we look to increase our coupons. New issues are being priced with plenty of 4% plus coupons. We are selectively swapping out of lower coupons while adding to our 4% coupon structure, keeping in mind that we want to maintain par value in the portfolio.

Source: Bloomberg, Ned Davis Research

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