KEY OBSERVATIONS
For the month of October 2024, the yield on the 10-year US Treasury Note ended at 4.29%, 51 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 5 basis points to 0.84% over Treasuries. The A Rated Corporate Credit Spread decreased by 3 basis points to 0.70%. The BBB Rated Corporate Credit Spread tightened by 8 basis points to 1.03%.

KEY OBSERVATIONS
For the month of September 2024, the yield on the 10-year US Treasury Note ended at 3.78%, 12 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 4 basis points to 0.89% over Treasuries. The A Rated Corporate Credit Spread decreased by 5 basis points to 0.73%. The BBB Rated Corporate Credit Spread tightened by 3 basis points to 1.11%.

KEY OBSERVATIONS
For the month of August 2024, the yield on the 10-year US Treasury Note ended at 3.90%, 13 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 1 basis point to 0.93% over Treasuries. The A Rated Corporate Credit Spread decreased by 3 basis points to 0.78%. The BBB Rated Corporate Credit Spread remained the same at 1.14%.

KEY OBSERVATIONS
For the month of July 2024, the yield on the 10-year US Treasury Note ended at 4.03%, 37 basis points lower from the previous month. The Bloomberg US Corporate Index remained the same at 0.94% over Treasuries. The A Rated Corporate Credit Spread remained the same at 0.81%. The BBB Rated Corporate Credit Spread remained the same at 1.14%.

KEY OBSERVATIONS
For the month of June 2024, the yield on the 10-year US Treasury Note ended at 4.40%, 10 basis points lower from the previous month. The Bloomberg US Corporate Index widened by 9 basis points to 0.94% over Treasuries. The A Rated Corporate Credit Spread increased by 9 basis points to 0.81%. The BBB Rated Corporate Credit Spread increased by 10 basis points to 1.14%.

KEY OBSERVATIONS
For the month of May 2024, the yield on the 10-year US Treasury Note ended at 4.50%, 18 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 2 basis points to 0.85% over Treasuries. The A Rated Corporate Credit Spread decreased by 2 basis points to 0.72%. The BBB Rated Corporate Credit Spread decreased by 3 basis points to 1.04%.

KEY OBSERVATIONS
For the month of April 2024, the yield on the 10-year US Treasury Note ended at 4.68%, 48 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 3 basis points to 0.87% over Treasuries. The A Rated Corporate Credit Spread decreased by 3 basis points to 0.74%. The BBB Rated Corporate Credit Spread decreased by 3 basis points to 1.07%.

KEY OBSERVATIONS
For the month of March 2024, the yield on the 10-year US Treasury Note ended at 4.20%, 5 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 6 basis points to 0.90% over Treasuries. The A Rated Corporate Credit Spread decreased by 5 basis points to 0.77%. The BBB Rated Corporate Credit Spread decreased by 8 basis points to 1.10%.

KEY OBSERVATIONS
For the month of February 2024, the yield on the 10-year US Treasury Note ended at 4.25%, 34 basis points higher from the previous month. The Bloomberg US Corporate Index remained the same at 0.96% over Treasuries. The A Rated Corporate Credit Spread remained the same at 0.82%. The BBB Rated Corporate Credit Spread remained the same at 1.18%.

KEY OBSERVATIONS
For the month of January 2024, the yield on the 10-year US Treasury Note ended at 3.91%, 3 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 3 basis points to 0.96% over Treasuries. The A Rated Corporate Credit Spread decreased by 3 basis points to 0.82%. The BBB Rated Corporate Credit Spread decreased by 3 basis points to 1.18%.

KEY OBSERVATIONS
For the month of December 2023, the yield on the 10-year US Treasury Note ended at 3.88%, 45 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 5 basis points to 0.99% over Treasuries. The A Rated Corporate Credit Spread decreased by 3 basis points to 0.85%. The BBB Rated Corporate Credit Spread decreased by 9 basis points to 1.21%.

KEY OBSERVATIONS
For the month of November 2023, the yield on the 10-year US Treasury Note ended at 4.33%, 60 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 25 basis points to 1.04% over Treasuries. The A Rated Corporate Credit Spread decreased by 25 basis points to 0.88%. The BBB Rated Corporate Credit Spread decreased by 26 basis points to 1.30%.

KEY OBSERVATIONS
For the month of October 2023, the yield on the 10-year US Treasury Note ended at 4.93%, 36 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 8 basis points to 1.29% over Treasuries. The A Rated Corporate Credit Spread increased by 8 basis points to 1.13%. The BBB Rated Corporate Credit Spread increased by 9 basis points to 1.56%.

KEY OBSERVATIONS
For the month of September 2023, the yield on the 10-year US Treasury Note ended at 4.57%, 46 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 3 basis points to 1.21% over Treasuries. The A Rated Corporate Credit Spread increased by 4 basis points to 1.05%. The BBB Rated Corporate Credit Spread increased by 3 basis points to 1.47%.

KEY OBSERVATIONS
For the month of June 2023, the yield on the 10-year US Treasury Note ended at 3.84%, 19 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 15 basis points to 1.23% over Treasuries. The A Rated Corporate Credit Spread decreased by 13 basis points to 1.04%. The BBB Rated Corporate Credit Spread decreased by 17 basis points to 1.52%.

KEY OBSERVATIONS
For the month of May 2023, the yield on the 10-year US Treasury Note ended at 3.65%, 22 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 2 basis points to 1.38% over Treasuries. The A Rated Corporate Credit Spread increased by 1 basis points to 1.17%. The BBB Rated Corporate Credit Spread increased by 3 basis points to 1.69%.

KEY OBSERVATIONS
For the month of April 2023, the yield on the 10-year US Treasury Note ended at 3.43%, 4 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 2 basis points to 1.36% over Treasuries. The A Rated Corporate Credit Spread decreased by 2 basis points to 1.16%. The BBB Rated Corporate Credit Spread decreased by 2 basis points to 1.66%.

KEY OBSERVATIONS
For the month of March 2023, the yield on the 10-year US Treasury Note ended at 3.47%, 45 basis points lower from the previous month. The Bloomberg US Corporate Index widened by 14 basis points to 1.38% over Treasuries. The A Rated Corporate Credit Spread increased by 14 basis points to 1.18%. The BBB Rated Corporate Credit Spread increased by 17 basis points to 1.68%.

KEY OBSERVATIONS
For the month of February 2023, the yield on the 10-year US Treasury Note ended at 3.92%, 41 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 7 basis points to 1.24% over Treasuries. The A Rated Corporate Credit Spread increased by 7 basis points to 1.04%. The BBB Rated Corporate Credit Spread increased by 7 basis points to 1.51%.

KEY OBSERVATIONS
For the month of January 2023, the yield on the 10-year US Treasury Note ended at 3.51%, 37 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 13 basis points to 1.17% over Treasuries. The A Rated Corporate Credit Spread decreased by 12 basis points to 0.97%. The BBB Rated Corporate Credit Spread decreased by 15 basis points to 1.44%.

KEY OBSERVATIONS
For the month of December 2022, the yield on the 10-year US Treasury Note ended at 3.88%, 27 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 3 basis points to 1.30% over Treasuries. The A Rated Corporate Credit Spread decreased by 3 basis points to 1.09%. The BBB Rated Corporate Credit Spread decreased by 4 basis points to 1.59%.

KEY OBSERVATIONS
For the month of October 2022, the yield on the 10-year US Treasury Note ended at 4.05%, 22 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 1 basis point to 1.58% over Treasuries. The A Rated Corporate Credit Spread increased by 2 basis points to 1.37%. The BBB Rated Corporate Credit Spread decreased by 2 basis points to 1.90%.

KEY OBSERVATIONS
For the month of September 2022, the yield on the 10-year US Treasury Note ended at 3.83%, 63 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 19 basis points to 1.59% over Treasuries. The A Rated Corporate Credit Spread increased by 21 basis points to 1.35%. The BBB Rated Corporate Credit Spread increased by 18 basis points to 1.92%.

KEY OBSERVATIONS
For the month of August 2022, the yield on the 10-year US Treasury Note ended at 3.20%, 55 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 4 basis points to 1.40% over Treasuries. The A Rated Corporate Credit Spread decreased by 2 basis points to 1.14%. The BBB Rated Corporate Credit Spread decreased by 5 basis points to 1.74%.

KEY OBSERVATIONS
For the month of July 2022, the yield on the 10-year US Treasury Note ended at 2.65%, 37 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 11 basis points to 1.44% over Treasuries. The A Rated Corporate Credit Spread decreased by 10 basis points to 1.16%. The BBB Rated Corporate Credit Spread decreased by 13 basis points to 1.79%.

KEY OBSERVATIONS
For the month of June 2022, the yield on the 10-year US Treasury Note ended at 3.02%, 17 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 25 basis points to 1.55% over Treasuries. The A Rated Corporate Credit Spread increased by 21 basis points to 1.26%. The BBB Rated Corporate Credit Spread increased by 31 basis points to 1.92%.

KEY OBSERVATIONS
For the month of May 2022, the yield on the 10-year US Treasury Note ended at 2.85%, 9 basis points lower from the previous month. The Bloomberg US Corporate Index tightened by 5 basis points to 1.30% over Treasuries. The A Rated Corporate Credit Spread decreased by 7 basis points to 1.05%. The BBB Rated Corporate Credit Spread decreased by 2 basis points to 1.61%.

KEY OBSERVATIONS
For the month of April 2022, the yield on the 10-year US Treasury Note ended at 2.94%, 60 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 19 basis points to 1.35% over Treasuries. The A Rated Corporate Credit Spread increased by 18 basis points to 1.12%. The BBB Rated Corporate Credit Spread increased by 21 basis points to 1.63%.

KEY OBSERVATIONS
For the month of March 2022, the yield on the 10-year US Treasury Note ended at 2.34%, 51 basis points higher from the previous month. The Bloomberg US Corporate Index tightened by 6 basis points to 1.16% over Treasuries. The A Rated Corporate Credit Spread decreased by 8 basis points to 0.94%. The BBB Rated Corporate Credit Spread decreased by 4 basis points to 1.42%.

KEY OBSERVATIONS
For the month of February 2022, the yield on the 10-year US Treasury Note ended at 1.83%, 5 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 16 basis points to 1.22% over Treasuries. The A Rated Corporate Credit Spread increased by 15 basis points to 1.02%. The BBB Rated Corporate Credit Spread increased by 18 basis points to 1.46%

KEY OBSERVATIONS
For the month of January 2022, the yield on the 10-year US Treasury Note ended at 1.78%, 27 basis points higher from the previous month. The Bloomberg US Corporate Index widened by 14 basis points to 1.06% over Treasuries. The A Rated Corporate Credit Spread increased by 13 basis points to 0.87%. The BBB Rated Corporate Credit Spread increased by 15 basis points to 1.28%.

The September inflation report issued by the Labor Department reports the consumer price index rising 2.4% from a year ago and the core index rising 3.3%. Both were, slightly above economists’ forecasts.

What a difference a few months makes. As noted in previous letters many at the Federal Reserve and private sector economists believed the trend to lower inflation to the FED’s 2% target would be bumpy. That has certainly been the case of late.

In our previous letter in January we noted that the trend to lower inflation and interest rates will be bumpy as it usually is. The consensus then pointed toward lower yields ahead driven by perceptions of a slowing economy both here in the U.S. and abroad.

Since the bond market low in mid-October 2023, a strong rally ensued. The 10-year Treasury yield fell from 4.99% to 3.79% on December 27, 2023 (source: Bloomberg 1/17/24). Investor’s expectations of future interest rates drive the market.

With interest rates reaching levels not seen since since 2007, divergent outlooks are increasing. On the one hand, a recent article noted that some money managers are betting against the corporate and high-yield bond markets by shorting the larger and more liquid exchange traded funds (source: Bloomberg
10/16/23).

The Federal Reserve’s aggressive campaign to reduce inflation to its acceptable target of 2% is clearly bearing fruit. Earlier in July, on 7/7/23, the Bureau of Labor Statistics reported declining job growth with nonfarm payrolls increasing 209,000, below consensus estimates.

”Since the full impact of monetary policy actions can take as much as 18 months to work its way through the economy, we will continue to look closely at available data to determine what, if any additional actions we may need to take.” (Patrick Harker, Philadelphia Fed 4/11/23 source: Bloomberg)

“It may be a mild recession. It may not be.” (Jamie Dimon, JP Morgan Chase CEO on a call with reporters as reported in The Wall Street Journal 1/14/23)

The recent hotter than expected jobs data sent the Dow Jones Industrial Average down over 600 points on Friday, October 7. That day the 10-year Treasury note yield rose to 3.88% and reached a multiyear high of 4.03% on October 14 (source; Bloomberg 10/18/22). Investors continue to react negatively to strong jobs data that will cause the Federal Reserve to continue its aggressive interest rate increases to battle inflation.

So, what drives investor interest in the 30-year auction and longer maturities? They might be measuring the impact of present day Fed rate and monetary actions on future economic activity and inflation. Some strategists see the 2-10 year curve inversion signaling a recession. The 10-year Treasury yields 2.92% while the 2-year Treasury yields 3.14%, today (source: Bloomberg 7/13/22). The curve is inverted the most since August of 2000 (source: ibid).

“This is not the kind of inflation from the 1960s and 70s” (Chicago FED president, Charles Evans 4/11/22). During that event before the Detroit Economic Club, Evans contended that the current spurt in prices is temporary, rather than sustaining and that inflation will revert back to pre-pandemic levels in a year or two (source: MarketWatch 4/13/22). The chart on page three shows the longer period, five to ten year inflation expectations of surveys by the University of Michigan remain subdued at about three percent.

Inflation outlooks show near term increases, but significant declines as the economy normalizes, moving beyond the abnormalities generated by the pan-demic. At the end of the 4th quarter the 10-year Treasury closed at 1.51%, an insignificant increase from 1.49% at the end of the 3rd quarter. Looking out over the next year, the chart above shows inflation expectations on a steady downward decline. (source: Bloomberg).

Inflation concerns remain low at the end of the third quarter with the 10-year Treasury closing at 1.49%. This is just slightly higher than the 1.47% yield posted on 6/30/21. Looking out over the next few years, growth and inflation expectations in the above chart are tame. (source: Bloomberg).

Inflation concerns subsided in the second quarter. The first half 2021 Investment Grade Index total return of -1.06% was a sharp reversal of the first quarter’s -4.5% (source: CreditSights and BAML). The High-Yield Index resiliency strengthened with a first half 2021 total return of 3.70% versus the 90 basis point positive return for the first quarter (source: ibid).

Inflation concerns rocked the bond markets during the first quarter driving the Investment Grade Index down –4.5% (source: CreditSights and BAML). However, the High-Yield Index showed resiliency and posted a 90 basis point positive return for the first quarter (source: ibid).

The Federal Reserve’s Vice Chairman, Richard Clarida stated that “the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished (source: Bloomberg  news 1/8/21). He did caution that it would take “some time” for economic activity and employment to reach the peak level of last February.

Even with all the uncertainties created by the pandemic, third quarter GDP forecasts are up around 30%. The Federal Reserve’s Bullard weighs in at 30% (source: Wall Street journal 10/6/20), while J.P. Morgan forecasts 34.5% (source: J.P. Morgan Global economic outlook survey).

It has been barely 4-months since the pandemic lead to the shutdown of not only the US but most nations’ economies. The human and economic damage and suffering will continue for some unknown time.

The recent violent fall in prices of many asset classes is on a scale most of us have not experienced. The repricing of equities has lead Malkiel (quoted above) to argue for investors to increase allocation to equities. By extension, this would apply to other asset classes experiencing significant price declines whose fortunes are tied to corporations and businesses. So, corporate bonds would also appear to be attractive investments.

2019 was a banner year for stocks and bonds , and 2020 is starting out robustly. The new Canada Mexico trade deal signed by President Trump and the trade agreement with China could lead to higher GDP in the USA, given the more level playing field they create. Also, we could see a large increase in corporate capital spending now, since the deals reduce many trade uncertainties. Furthermore, the China deal leaves many of the tariffs in place, which is meant to motivate the Chinese to enact the broader phase two trade agreement.

As we move into the 4th quarter of 2019, talk of negative interest rates continues. The recent U.S. Govern-ment’s auction of 30-year bonds on Thursday, October 10 drew a record low yield of 2.17% (source: Bloomberg 10/10/19). This is considered a strong sign of declining investor expectations for economic growth and inflation. The trend is global with the U.K. and Germany also posting record low yields for their respective 30-year bonds (source: Bloomberg 10/10/19).

Rising uncertainty and muted inflation “strengthens the case for a somewhat more accommodative stance of policy.” Officials “will act as appropriate to sustain the expansion” – Federal Reserve Chairman Jerome Powell as reported in The Wall Street Journal 7/16/19.

What a difference a year and even 6-months makes. For the past two years, Investors were fleeing the bond markets as forecasting rising Treasury Bond yields portended red ink. Just last October the 10-year Treasury Bond yielded 3.24% at its peak (source: Macrotrends 10-year Treasury historical chart 7/17/19).

The outlook for interest rates has steadily evolved over the first quarter. Now the Fed is unanimous in their outlook with all members voting to maintain the current level of interest rates (source: Federal Reserve board press release 3/20/19) . Furthermore, the minutes infer that the members have an aversion to increasing interest rates further, because of the increasing risks to the U.S. economy from slowing global growth and lower inflation, that surprised Fed officials.

“We’re in a place where we can be patient and flexible and wait and see what does evolve” Federal Reserve chairman, Powell 1/11/19 regarding future interest rate increases

These comments made by the Fed chairman exemplify the changed position of the Fed. Given the moderating growth of the global economy and some U.S. economic measures, the Fed is signaling that they can now be patient about further increases in interest rates.

Interest rates moved higher in the third quarter, and fixed income investors with long- term investment horizons might say, “It’s about time.” Why? (1) Bond interest delivers an important, ongoing income stream, (2) is important for wealth preservation, and (3) can be a significant element of fixed income returns.

2022 was the worst year on record for investment grade corporate bonds largely due to a dramatic increase in interest rates. With this recency bias and the markets focused on the actions of the US Federal Reserve, many investors have looked to other income producing asset classes as a replacement for their corporate bonds. While these asset classes may have outperformed in a rate hiking event, it is important to remember that these other asset classes have a risk profile all their own during a credit event.

The saying “Cash is King”, popularized by Volvo CEO Pehr Gylrnhammar during the 1987 market crash, has become a rallying cry during periods of market volatility. The premise seems sound, no volatility in times of market turmoil, instant liquidity to deploy capital when pricing seems reasonable, and we all know having cash on hand for private transactions certainly beats the questions that come with check or credit. But is this always the case?

The old joke about economists being created to make weathermen look good has been around for as long as finance and meteorology. To be fair both are very tough professions, trying to predict with a high degree of certainty a force that changes rapidly and affects the lives of many. In an attempt to accomplish that feat, both professions have poured the most significant advancements of theory, science, and technology into their practice, trying as they might to keep the next market correction / rebound or natural weather disaster / beautiful sunny day from being a surprise. As we know all too well, this unfortunately doesn’t always work out, and we are sometimes left on the wrong side of the trade or soaking wet on the golf course.

As time goes by, the need for balance in our lives becomes increasingly important. We must maintain a work – life balance to take care of career, family, and self. We need to maintain a balanced budget to make sure we prioritize what we want, what we need, and what we must save for the future. And of course, we need a balanced diet to curtail eating some of the comfort foods we love to ensure health and longevity. It’s a balancing act worthy of the Flying Wallendas.

The same could be said for our investment portfolios. The idea of optimizing a portfolio to maximize return based upon an investor’s comfort level with risk is as intuitive as balancing your checkbook, or your diet. It can also present similar challenges. Often investors will look to abandon their fixed income allocations when yields are low, when they think rates are set to rise, or when outsized opportunities for gain and/or higher yields present themselves in other income producing investments.

There are many reasons that an investor may employ a professional bond manager. One of the most important considerations when working with a professional bond manager is its access to institutional trading desks and its ability to purchase bonds at a fair or attractive price. Many investors are aware that equities are exchange traded, which allows investors to easily buy or sell equity securities with relatively low transaction costs.

Financial professionals not only need to be effective investors but also behavioral finance coaches for their clients. When markets draw down or are volatile, questions will arise from concerned clients and perspective will need to be provided. Since 1994 DALBAR has published their annual Quantitative Analysis of Investor Behavior report to help Financial Professionals discuss the prudence of a long-term, buy and hold approach.

It may no longer be true that “bigger is better” when picking a corporate bond manager. After the financial crisis, reforms to cut global risks have changed some basic features of the corporate bond market. Bond market volumes are healthy and exceed levels of 2007, but the average bond transaction is 40% smaller today.

As a Corporate Bond Manager we often receive inquiries regarding our thoughts on the Bank Loan Market especially in the current interest rate environment where the 10-year US Treasury Bond yield has increased 1% over the last 9 months. We believe that the asset class may warrant a place in an investor’s asset allocation and complement other credit sectors such as Investment Grade Corporates and High Yield but we suggest exercising caution, as all loans are not created equal.

It is common for individual fixed income investors to construct portfolios utilizing a “ladder” strategy, purchasing bonds over a specific time frame, 5 or 10 years for example, and in equal installments – an issue coming due each calendar year. This approach is fairly straight forward; however, we find that investors pursuing this type of strategy give up potential return.

We concentrate our efforts exclusively in the U.S. taxable corporate bond market, managing a wide range of strategies from short to intermediate duration, investment grade to high yield. In all cases, fundamental credit research is a primary element of our security selection process.