Treasury yields continued to rise during the third quarter of 2022. The largest movement was seen in T-bills as the Fed raised the fed funds rate by 150 bps during the quarter. This trend has resulted in much of the yield curve being inverted. The largest movement was in the 3-month bill that rose 165 bps to 2.317% as of 9/28/22. Other notable movements were the 10-year, rising 83.1 bps to 3.847%, and the 30-year, rising 56.9 bps to 3.754%. You can see the complete Treasury movement below.
Source: Bloomberg
Despite volatility in equities and spreads throughout the quarter, the net movement in spreads was minimal. The Bloomberg U.S. Aggregate Bond Index was up only 2 bps to +155 bps as of 9/28/22. Spreads on taxable municipals were also slightly higher. They rose 4 bps to +133 bps over the same time frame.
During the quarter, we continued to maintain our durations in the 6.00–6.50 range. Wider spreads and longer durations hurt our performance during the quarter, but locking in higher book yields should be beneficial to our strategy going forward. We started swapping out of some of our lower-book-yield, higher-duration securities to buy longer tax-free munis at higher book yields and deeper discounted dollar prices. We believe that these securities will outperform taxable bonds as Treasury rates rise.
As we move into the fourth quarter of 2022, we will look to continue increasing the book yield on portfolios by swapping out of lower-book-yield securities. We will continue to look for crossover buying opportunities into long tax-free municipals as long as the Muni/Treasury ratio remains attractive. We expect that ratio to come down over time.
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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.
