Quarterly Update

Charles Luke, Managing Director, Co-Director, Fixed Income | Oct. 2021

Yield Rise and Opportunistic Income Continues to Climb

Opportunistic credit outperformed during last Fed tightening

High-grade fixed income sensitive to COVID-19, supply chain concerns

Credit somewhat less sensitive to equity market volatility

10-Year Treasury rates ended the quarter at 1.53%, 0.07% higher than June 30. Inflation and its influence on rates dominated the headlines, and concerns over global energy supply sparked a swift increase in the price of crude oil, which has a strong short-term correlation to 10- and 30-Year Treasury yields. Continued jitters around inflation and supply chain impacts from the Delta variant have helped create a high level of sensitivity within high-grade fixed income to price-related measures.

We continue to believe that post-virus prices will be stable and that inflationary forces will not become persistent. However, increases in the Fed’s preferred measures of inflation, notably PCE Core inflation, up 3.6%, and the 5-Year Forward, up to 2.28%, have been stickier than expected.

In the near term, this will negatively affect investment grade fixed income. The cumulative Q3 2021 return within investment grade fixed income peaked at 1.37% by early August, but then fell 1.32% to finish the quarter up just 0.05%. We continue to recommend global opportunistic credit, as it has a strong history of rallying in a rising rate environment.

During the last Federal Reserve tightening cycle, from December 2015 to December 2018, opportunistic credit returns significantly outperformed investment grade markets. High Yield Corporates, Leveraged Loans, High Yield Structured Credit and Emerging Market High Yield rose 7.2%, 4.8%, 11.0% and 6.53% annualized, while the aggregate high-grade bond market was up only 2.11% annualized. During the start of the post-COVID-19 economic recovery, this relative trend has returned, with the same asset classes outperforming high-grade fixed income by 16.39%, on average.

Not only has credit experienced a surge, but its sensitivity to the equity market has also been absent, a departure from previous periods. During the equity volatility in Q3 2021, high yield bonds were remarkably resilient, and while concerns over Chinese issuers have caused a slight negative impact, year-to-date returns are still outperforming investment grade by a wide margin.

Overall, taxable fixed income markets are poised to benefit from the continued expansion, especially within opportunistic credit sectors.

Key Points

Opportunistic credit outperformed during last Fed tightening

High-grade fixed income sensitive to COVID-19, supply chain concerns

Credit somewhat less sensitive to equity market volatility

Stay Informed.

Get our Insight delivered straight to your inbox.

Important Disclosures

Important Information

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 Funds’ investment objectives, risks, fees, and other expenses.

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.

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.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.