Quarterly Update

Gregory S. Kaplan, Director of Fixed Income, Managing Director | Apr. 2021

Sharp Rise in Rates Sets Us Up for Better Returns Going Forward

U.S. government yields moved sharply higher over the quarter

Inflation expectations are overdone, in our view

Continue to overweight lower credit quality issuers that will benefit from reflation

Broad market interest rates moved higher during the first quarter, reflecting increasing optimism for U.S. and global economies as well as higher inflation expectations. These moves can be attributed to significant progress toward ending the pandemic, coupled with the massive $1.9 trillion dollar stimulus bill. The 10-year Treasury yield increased 83 basis points (see chart) to 1.74%, leading to negative returns across rate-sensitive fixed income asset classes. The Bloomberg Barclays Aggregate index, for example, returned -3.37% for the quarter. Interestingly, municipals bucked this trend due to heavy demand for tax sheltered issues — the broad Bloomberg Barclays Municipal Bond index fell only -0.35%. Overall, the combination of low credit quality and low rate sensitivity was the clear winner, supporting CNR’s overweight to the opportunistic income sectors (see chart).



The Federal Open Market Committee (FOMC) meeting on March 17 provided timely and transparent updates that confirmed the Fed’s optimism about growth and continued belief that inflation concerns are overblown. Chairman Jerome Powell reiterated that the Fed is “…still not even thinking about removing accommodation” and pushed back on the growing chorus of traders betting the Fed will taper bond purchases by year-end and raise short-term interest rates as early as mid-2022. The CNR Fixed Income team continues to believe that the policy shift in 2020 from a pre-emptive approach to reactionary policy strongly indicates that the Fed won’t lift rates until 2023 or later.

Investment-grade fixed income becomes more attractive with higher rates, but we feel that the short-term path of least resistance is for rates to move higher before moderating by year-end. Inflation expectations, a key component in interest rates, are too high in our view, and a moderating factor as to further rate increases. Thus we expect fixed income returns to recover in the coming quarters and encourage investors to take advantage of higher yields while maintaining an investment horizon of a full interest rate cycle (typically about five years). In terms of broader portfolio strategy, we still see room for quality spreads to tighten further and we continue overweighting lower credit quality issues in both our investment-grade and high-yield allocations.

Key Points

U.S. government yields moved sharply higher over the quarter

Inflation expectations are overdone, in our view

Continue to overweight lower credit quality issuers that will benefit from reflation

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Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation. Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying, and lengthy lockup provisions.

CNR is free from any political affiliation and does not support any political party or group over another.

Index Definitions

The Treasury index is an index based on recent auctions of U.S. Treasury bills and is commonly used as a benchmark when determining interest rates, such as mortgage rates.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Palmer Square CLO Debt Index (“CLO Debt Index”) is a rules-based observable pricing and total return index for collateralized loan obligation (“CLO”) debt for sale in the United States, original rated A, BBB, or BB or equivalent.

The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market.

Bloomberg Barclays 1-3 Year Government/Credit Index (LGC3truu) is an unmanaged index considered representative of short-term U.S. corporate and government bonds with maturities of 1-3 years.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

Bloomberg Barclays U.S. Corporate High Yield Index (barhiyd) is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity.

Bloomberg Barclays High Yield Municipal Bond Index (barhiym) is an unmanaged index considered representative of non-investment-grade bonds.

Vanguard Consumer Staples ETF seeks to track the performance of a benchmark index that measures the investment return of consumer staples stocks.

The iShares U.S. Utilities ETF seeks to track the investment results of an index composed of U.S. equities in the utilities sector.

Vanguard Real Estate ETF seeks to track the investment performance of the MSCI US Investable Market Real Estate 25/50 Index.

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