As the US government moved forward with the COVID-19 vaccination plan during the first quarter of 2021, the stock market experienced increased volatility while long-term Treasury yields rose precipitously. As Treasury yields trended higher, we saw continued outperformance in taxable municipals as spreads continued to tighten. Becoming more defensive and maintaining our heavy weighting in taxable municipals relative to the benchmark helped our strategy as yields in the Treasuries market rose.
As the first quarter ends, the largest movement in Treasury yields is seen in the longer-maturity securities as the yield curve continues to steepen. The 20-year Treasury experienced the biggest increase in yield as of 3/29/21, rising 84.1 bps to 2.283% for the quarter. That increase was followed closely by the 10-year and 30-year Treasuries, which rose 76.2 bps to 1.678% and 73.5 bps to 2.381%, respectively. The front end of the curve remained flat to slightly up in yield during the quarter. This trend was in line with our expectation, as we predicted that the yield curve would continue steepening as yields continue to trend higher and the Fed continues to keep short-term rates in the 0–0.25% target range.
Spreads on taxable municipals continued to tighten during the quarter, benefiting our strategy. The Bloomberg Barclays Taxable Muni US Agg Index tightened 32 bps to +95 bps as of 3/29/21, while the Bloomberg Barclays US Agg Corporate Bond Index remained flat at +96 bps. The tightening taxable municipal spreads helped Cumberland’s performance relative to the benchmark as a result of our larger exposure to municipals and lighter exposure to corporates and Treasuries.
At the end of last year, we started selling some of our longer maturities, with an emphasis on corporates as their spreads tightened faster than taxable municipals did. We used this window as an opportunity to take profits while shortening durations and becoming more defensive. We are continuing to add more defensive securities to the portfolios, including Treasury floaters and T-bills, as we discussed in last quarter’s article. We are also increasing our weighting in short agency securities to get portfolio durations down and to protect the gains from longer securities that we sold to take advantage of the rally in spread securities.
Going forward we will continue to structure portfolios defensively, as it is our belief that Treasury yields will continue to trend higher as COVID-19 vaccinations are opened up to younger age groups. We will look to continue shortening durations while taking a conservative approach to investing portfolios in the current yield environment. We will maintain an increased weighting in defensive securities as outlined above while looking to take profits where we can in securities that have benefited from tighter spreads.
Daniel Himelberger
Portfolio Manager & Analyst – Fixed Income
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