Treasury yields continued to be extremely volatile during the first quarter as banking issues sent shockwaves through the market, signaling a slowdown in the Fed’s hiking cycle. The net result of interest rate movements during the first quarter was lower yields across most of the curve. The biggest decline in rates was seen in the 3-year Treasury, which dropped 34.4 bps to 4.084% during the quarter as of 3/29/23. The long end of the curve also declined, with the 10-year dropping 29.5 bps to 3.582% and the 30-year dropping 17.4 bps to 3.791% over the same period. You can see the rest of the Treasury curve changes in the chart below for that period.
The banking issues also resulted in widening spreads on investment-grade corporates during the quarter. The Bloomberg US Corporate Bond Index peaked at +163 bps on 3/15/23 before dropping back down to +147 bps on 3/29/23 (up 17 bps on the quarter). The spread on the Bloomberg Taxable Muni US AGG Index dropped 3 bps to +125 bps as of 3/29/23. This trend benefited our strategy since we have a higher weighting in taxable municipals versus corporates relative to the benchmark.
As we move into the second quarter of 2023, we will look to continue increasing the book yield on portfolios by swapping out of lower-book-yield securities. We expect the volatility in the market to continue until there is more clarity on when the FOMC will stop raising rates. We expect the hikes to slow down sooner rather than later now that FOMC policy is starting to create cracks in the economy, as seen with issues in the banking sector.
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
