Total Return Perspectives: August 2021
U.S. Treasuries ended their 4-month streak of positive returns and falling yields in August. Intermediate maturity yields rose more than shorter and longer maturities, as the market began to see through the impact of the Delta variant and focus more on the Federal Reserve’s plan to scale back their bond buying program.
Review:
- The Bloomberg U.S. Aggregate Bond Index (BC Agg) returned -0.19% in August, its first negative return in five months. The Bloomberg U.S. Corporate Index (-0.30%) led the major investment grade sectors lower as duration weighed on returns. Treasuries (-0.18%) also broke their positive streak as the yields rose across the curve. Mortgage-backed securities (MBS) edged out a small victory as the best performer (-0.16%) largely due to their shorter duration.
- The latest headline CPI came in at 5.4% year-over-year (with core CPI at 4.3%), once again exceeding the Fed’s 2.0% long-term target. With each passing month that CPI data surpasses the Fed’s target, it becomes more difficult to dismiss the trend as just “transitory.” However, Fed Chair Powell successfully assuaged the market’s inflation concerns at his Jackson Hole speech. As discussed in the past, we are closely monitoring this market risk.
- While Treasury yields rose across the maturity spectrum, the “belly” of the yield curve sold off the most. The 2-year yield rose 2 basis points to 0.21%, the 5-year yield increased 7 basis points to 0.77%, the 10-year yield gained 6 basis points to 1.30%, and the 30-year yield tacked on 3 basis points to 1.93%.
- The option-adjusted spread of the Corporate Index widened 1 basis point in August to 87 basis points. Corporate spreads widened on higher-than-expected supply early in the month but recovered on month-end buying.
- The Bloomberg U.S. MBS Index underperformed duration-matched Treasuries by 3 basis points as spreads for the sector widened 3 basis points in August.
- The fund (+0.06%) outperformed the BC Agg (-0.19%) in August. The outperformance is mostly attributable to a reduced duration profile and contributions from sector rotation and security selection.
Standardized performance can be viewed here: Monthly and Quarter End Performance
Outlook:
- We are exiting a seasonally slow time in the market, but the period after Labor Day has historically experienced elevated volatility. Treasury yields are benefitting substantially from Fed buying and even if inflation moderates from here, Treasury yields are too low for this point in the inflation cycle. The Fed settled the market’s nerves in August but the combination of elevated inflation with a looming taper keeps us on alert.
Eddy Vataru
Chief Investment Officer – Total Return
John Sheehan
Vice President & Portfolio Manager
Daniel Oh
Vice President & Portfolio Manager
Opinions expressed are those of the author, are subject to change at any time, are not guaranteed and should not be considered investment advice.
Performance data quoted represent past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be higher or lower than the performance quoted. Performance data current to the most recent month end may be obtained by calling shareholder services toll free at (866) 236-0050.
The fund’s Gross Expense Ratio (as of 3/31/21) is 0.70%
The Bloomberg U.S. Aggregate Bond Index (BC Agg) is an unmanaged index which is widely regarded as the standard for measuring U.S. investment grade bond market performance. This index does not incur expenses and is not available for investment. The index includes reinvestment of dividends and/or interest income.
The Bloomberg U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.
The Bloomberg U.S. Corporate Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. The index includes exclusively corporate sectors, including Industrial, Utility, and Finance, which include both U.S. and non-U.S. corporations.
Sector returns above are those of the Bloomberg U.S. Aggregate Bond Index.
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A basis point is a unit that is equal to 1/100th of 1%.
Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semiannually.
Investment grade (IG bonds are bonds with high and medium credit quality assigned by a rating agency. For Standard and Poor’s, investment grade bonds include BBB ratings or higher. For Moody’s, the cutoff is Baa.
A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
Duration measures the sensitivity of a fixed income security’s price (or the aggregate market value of a portfolio of fixed income securities) to changes in interest rates. Fixed income securities with longer durations generally have more volatile prices than those of comparable quality with shorter durations.
Spread is the difference in yield between a risk-free asset such as a U.S. Treasury bond and another security with the same maturity but of lesser quality.
Option-Adjusted Spread is a spread calculation for securities with embedded options and takes into account that expected cash flows will fluctuate as interest rates change.
Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.
The producer price index (PPI) is a group of indices that calculates and represents the average movement in selling prices from domestic production over time.
The Job Openings and Labor Turnover Survey (JOLTS) program produces data on job openings, hires, and separations.
Treasury inflation-protected securities (TIPS) are a type of Treasury security issued by the U.S. government that are indexed to inflation in order to protect investors from a decline in purchasing power.
It is not possible to invest in an index.
All investments involve risk. Principal loss is possible. Treasury notes are guaranteed by the U.S. government and thus they are considered to be safer than other asset classes.
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© Osterweis Capital Management
