Anfield Fixed Income Update: August 2022
During a period where good news is seemingly bad news for the markets, and equity and fixed income markets cannot seem to find a clear direction, we look back on what has happened and what this could mean for the near-term future. Specifically, on the fixed income side, domestic investment grade (IG) and high yield (HY) bonds saw one of the best total return months since 1999 this past July. For IG credit, according to CreditSights, July 2022 now ranks as the 13th best monthly total return performance since 1999 as falling long-end yields worked together with spread compression to generate total returns of +2.9%, marking the best monthly performance in 2022 and the best monthly performance since July 2020 (+3.2%). For HY credit, according to CreditSights, July (+6.0%) ranks even higher and was the 7th best monthly total return performance since 1999 and the strongest month of return since October 2011. Both strong performances were aided by numerous items crucial to fixed income performance, as we will explore further. Firstly, falling volatility in rates (MOVE index down 10.8%) and equities (VIX down 24.2%) worked with our expectation that the US Fed is getting closer to their terminal rate for the current hiking cycle after implementing another mega 75bps hike at the end of July. On the downside (remember, good news is bad news and bad news is good news) economic fundamentals showed more signs of growth erosion as the advance reading of 2Q 22 GDP came in negative for the 2nd consecutive quarter while a range of other metrics, including Services PMI, came in below expectations.
Looking forward, analysts appear bullish as CreditSights (CS) points out that in the months following strong IG total returns, the median total return is +1.0% with 14 bps of spread compression and an 11bps decline in yields, while in those months following strong HY total returns, the median total return is +1.5% with 27bps of spread compression and a 32bps decline in yields. While past returns are in no way indicative of future results, the market appears primed to sweep into the anticipated HY surge as the end of July saw funds which invest in HY bonds take in cash after back-to-back weeks of outflows, registering an influx totaling $4.83bn for the week ended July 27th, the biggest inflow in over 2 years. (Source: CreditSights, Bloomberg)
Current Fixed Income Positioning
Universal Fixed Income Strategies: Benchmark agnostic and line-item bond security portfolios looking to highlight our best ideas in bond space
Dynamic Bond strategy: Benchmark aware to the Bloomberg Barclay’s Aggregate Index and is a top-down macro-focused ETF of ETFs.
“Anfield Affection Gauges”: What fixed income sectors & exposures do we like, and what do we dislike?
Current Fixed Income Positioning Definitions:
Duration represents the current value for each of the funds and indices noted
Curve represents where each of the funds and indices are positioned on the yield curve
Government represents the percentage allocated to Government bonds within the funds and indices
Credit represents the percentage allocated to Investment Grade and High Yield Credit within the funds and indices
MBS represents the percentage allocated to Mortgage-Backed Securities within the funds and indices
Yield (YTM) represents the Yield to Maturity of the funds and indices
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