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August 2023

The Bond Market Remains Strong

Key Points

  • Income is the main driver of returns over the quarter and year-to-date
  • The credit environment has not deteriorated, which is supporting high, positive total return
  • The pinch from higher rates has not occurred in the leveraged lending market, which is outperforming comparable positions

Taxable fixed income markets were resilient over Q2 2023. Despite negative returns from higher rates, income offset disruptive price moves. The Bloomberg U.S. Government/Credit Intermediate Index earned 1.1% from yield while price performance fell -1.9%, resulting in a total return of -0.8%.1 High yields make bond prices less volatile, and returns are more stable, especially relative to the low interest rate period of the last decade. Year to date 2023 performance remains positive, up 2.0%, and, since the market bottom on October 20, 2022, bonds are up 5.0%.2 Steady progress is being made to recover 2022 losses.

While returns were negative, we remain optimistic on the bond market. We believe yield will continue to add positive performance, which in the absence of significantly higher rates will lead to above average returns. At these rates, we expect the reinvestment of principal and interest to compound the effects of income, leading to further portfolio stability. 


Chart 1: Bloomberg Gov/Credit Index Q2 2023 Return Decomposition
Source: Bloomberg Gov/Credit Intermediate Index, LF97TRUU as of June 30, 2023

The credit environment continued its strong 2023 performance, with spreads dropping another 0.2% in investment grade and 0.6% in high yield corporate bonds on the back of a salvo of positive economic surprises at the end of the quarter, including healthy upward revisions to Gross Domestic Product (GDP) and personal consumption.3,4

High yield markets continue to surprise us. U.S. high yield bonds, U.S. leveraged loans and emerging market high yield bonds were up 1.8%, 3.2% and 1.6%, respectively.5 That takes year-to-date performance to 5.4%, 6.5% and 3.2%.5 Of note, the expected negative impact from higher rates has yet to arrive in leveraged lending. The sector continues to outperform similarly rated corporate debt. In addition, high yield tranches of collateralized loan obligations are experiencing a significant positive upswing, climbing 4.6% over the quarter and 8.6% for the year.6

We continue to recommend an overweight to bonds to reduce portfolio risk as odds of a recession remain elevated and we believe the market is on track to produce above average returns in 2023. 


Chart 2: Palmer Square BB CLO Index Cumulative 2023 Return
Source: Palmer Square BB CLO Index, PCLOBBTR, as of June 30, 2023

1 Bloomberg Government/Credit Intermediate Index, Ticker: LF97TRUU

2 Bloomberg Government/Credit Intermediate Index, Ticker: LF97TRUU

3 Bloomberg Corporate Bond Index (LUACTRUU) and Bloomberg High Yield Corporate Bond Index (LF98TRUU) 4 GDP Upward Revision: GDP CQOQ, Personal Consumption Revision: GDPCTOT%

5 U.S. High Yield Bonds: Bloomberg U.S. High Yield Index, Bloomberg: LF98TRUU Index

Leveraged Loans: Morningstar LSTA Leveraged Loan Index, Bloomberg: SPBDAL Index

Emerging Market High Yield Bonds: Ice BofA High Yield USD Emerging Markets Liquid Corporate Plus Index, Bloomberg: EMHY Index

6 Palmer Square BB CLO Index, PCLOBBTR

Past performance or performance based upon assumptions is no guarantee of future results.

Index performance is provided as a benchmark. It is not illustrative of any particular investment. Indices are unman-aged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.

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