FSEC - Taxable Total Return Q2 2022 Review

• As the Treasury curve flattened and yields rose, spreads on investment-grade corporates and taxable municipals continued to show signs of weakness.
• 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.
• As we move into the third quarter of 2022, we will look to continue increasing the book yield on portfolios as we look for attractive opportunities in the market.

By Daniel Himelberger

Treasury yields continued to rise during the second quarter of 2022. The largest movement was seen in T-bills as the Fed raised the fed funds rate by 75 bps in June. This trend has resulted in an extremely flat yield curve. The largest movement was in the 6-month bill, which rose 147.4 bps to 2.429%. Other notable movements were the 10-year’s rising 68.3 bps to 3.024% and the 30-year’s rising 71.2 bps to 3.162%. You can see the complete Treasury movement below.

As the Treasury curve flattened and yields rose, spreads on investment-grade corporates and taxable municipals continued to show signs of weakness. As of 6/30/2022, the Bloomberg Barclays US Agg Corporate Bond Index was up 37 bps for the quarter at +153 bps. That is the highest level since June 2020. Spreads on taxable municipals performed slightly better but still trended higher as they rose 11 bps to +129.

During the quarter, we continued extending our durations to lock in some higher book yields. We moved our target duration from 4.50–5.00 to 6.00–6.50. 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.

As we move into the third quarter of 2022, we will look to continue increasing the book yield on portfolios as we look for attractive opportunities in the market. We have started doing some crossover buying into long tax-free municipals as we have seen the muni/Treasury ratio reach the 150% range. We expect that ratio to come down over time.

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