Total Return Gov/Credit Third-Quarter Review
Treasury yields dropped precipitously during the third quarter of 2024. The biggest decline was seen on the front end of the curve, which accelerated lower when the FOMC cut the fed funds rate by 50 basis points at the September meeting. This resulted in the yield on a 1-year T-bill dropping a total of 110.7 basis points during the quarter to close at 4.01%. While not as pronounced, the long end of the curve also experienced significant declines in yield. The 10-year dropped a total of 61.5 basis points to close the quarter at 3.78% while the 30-year fell 43.9 basis points to 4.12%. You can see the complete Treasury curve movement in Chart 1 below.
Chart 1
Source: Bloomberg
Investment-grade corporate bonds outperformed taxable municipal bonds during the quarter. The spread on the Bloomberg US Corporate Bond Index decreased by 5 basis points to +89, whereas the spread on the Bloomberg Taxable Muni US AGG Index increased by 2 basis points to +85. As highlighted in our earlier quarterly reports, we believe that the potential for further gains in these spread products has largely been realized following a robust performance over the past several years. (Refer to Charts 2 and 3, which illustrate the spread movements over the last decade for both the Bloomberg Taxable Muni US AGG Index and the Bloomberg US Corporate Bond Index.) The Taxable Muni Index remains near 10-year lows, while the Corporate Index is at multi-year lows. Consequently, we have started to reduce our overweight position in these securities and are reallocating towards Treasuries. We anticipate that these spreads will widen from their current levels, creating an opportunity to increase our investment in these spread securities in the future.
Chart 2. Taxable Muni Index
Source: Bloomberg
Chart 3. Corporate Bond Index
Source: Bloomberg
As we move into the fourth quarter of 2024, we will closely monitor economic data, with a particular focus on inflation. Our long-term outlook anticipates lower interest rates, as we expect the Federal Reserve to continue cutting rates into next year. Accordingly, you can expect us to gradually increase our Treasury exposure over time, as long as spreads remain at or near multiyear lows. Our goal is to maintain higher liquidity levels, which will provide more flexibility as we make strategic adjustments going forward. While taking a conservative approach to credit, we will also seek to be opportunistic in pursuing attractive investment opportunities as they become available.
Daniel Himelberger
Portfolio Manager & Fixed Income Analyst
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