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Anfield Fixed Income Update: January 2022


Taking a moment to step back and analyze the composition and trajectory of the domestic fixed income market as the new year gets under way, we start by looking to CreditSights’ short-term fixed income outlook. While rates markets have seen a bumpy start to 2022 as US Treasury yields have climbed higher, spread products like corporate credit have generally held up well. However, for many fixed income asset classes, duration – a measure of sensitivity to interest rate changes – is near all-time highs, leaving them vulnerable to total return losses on even modest moves in rates.


Within the domestic market, we believe high yield (HY) fixed income products (rated below BBB), are best positioned to generate positive total return in 2022, as it offers some yield and a relatively short duration profile as compared with other asset classes. European investment grade (IG), US IG, Munis and US Treasuries offer the least yield per unit of duration, leaving these asset classes particularly vulnerable to return volatility in a rising interest rate environment. This is particularly important considering as of the week of this writing, most Wall Street investment banks are now forecasting 3-4 interest rate hikes from the Federal Reserve during the year.


In conjunction with the large move in US Treasury yields at the start of the year, IG and HY yields have also climbed. This move resulted in total return losses totaling -1.7% for IG and -0.9% for HY as the current mix of very low yields and relatively long duration leaves these asset classes susceptible to total return losses on even relatively small moves in the broader rate environment. IG effective duration, as of January 10th, stands at 8.2 years, well longer than the long-term median of 6.2 years and the post-GFC median of 7.0 years. HY, on the other hand, has not seen a similar duration extension as duration for this asset class stands at 4.2 years, in-line with both the post-GFC and long-term median.

Sources: CreditSights (return data as of 1/10/2022)

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.



Disclosures:

Current Fixed Income Positioning Definitions:

o Duration represents the current value for each of the funds and indices noted

o Curve represents where each of the funds and indices are positioned on the yield

curve

o Government represents the percentage allocated to Government bonds within the

funds and indices

o Credit represents the percentage allocated to Investment Grade and High Yield

Credit within the funds and indices

o MBS represents the percentage allocated to Mortgage-Backed Securities within the

funds and indices

o Yield (YTM) represents the Yield to Maturity of the funds and indices


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