Anfield Fixed Income Update: February 2021
Volatility surrounding the US Treasury (UST) curve picked up significantly during the month of February, bringing both the belly and long end of the curve to new recent highs. As of February 24th, the 10-Year was up 27 basis points month-to-date, closing at 1.38%. The 30-Year broke through its 2% barrier, ending February 24th at 2.24%. Our teams view for 2021 has been for the 10YR to reach 1.25% and then continue to drift upwards perhaps has high as the 1.40’s this year.
Where is this increase coming from? Though there has not been a clear singular catalyst for the recent movements, the rising rates are widely expected to be from rising expectations for strong growth during 2021 coupled with the risk of stronger than expected inflation. Declining COVID-19 cases, increasing injection rates and vaccination distribution, and the continued push by the Biden Administration for an additional stimulus packaged currently priced at $1.9 trillion are all tailwinds for the increasing growth and inflation expectations.
Is inflation accelerating and is it a big deal? While accelerating inflation has not been observed in the widely watched CPI or PCE metrics, several other datapoints indicate some price pressure is emerging including energy and other commodity prices, manufacturing input prices and indicators of logistics bottlenecks. While these pressures could prove to be temporary and ultimately not leak through to consumer prices, it is likely that they will keep inflationary fears elevated in the short-term. Currently, TIPS inflation break-evens reflect these elevated concerns, sitting above their pre-pandemic highs with the 10-Year breakeven at 2.21% (highest since 2014).
Source: CreditSights & yCharts
CURRENT FIXED INCOME POSITIONING
Sources: Morningstar, Bloomberg, Manager as of January 31, 2021
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 strategy.
“Anfield Affection Gauges”: What fixed income sectors & exposures do we like, and what do we dislike?
Universal Strategies Long Duration Gov’t Bonds High Yield Mortgages Structured Products Higher /CLO's Qlty Credit
Government Bonds Mortgages Emerging Market Debt High Yield Higher Quality Credit
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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