LQDB - Total Return Taxable Fixed Income - 3rd Quarter 2023 Review

2023-09-28 12:29:00 ET

Summary

• Treasury yields rose during the 3rd quarter as market participants digested economic data and the Fed continued to maintain a hawkish bias, leading to expectations that rates will remain higher for longer.
• Spread volatility remained muted during the 3rd quarter, with both IG corporates and taxable munis tightening.
• As we move into the 4th quarter of 2023, we will look to continue increasing the book yield on portfolios by swapping out of lower-book-yield securities.

By Daniel Himelberger

Treasury yields rose during the 3 ^rd quarter as market participants digested economic data and the Fed continued to maintain a hawkish bias, leading to expectations that rates will remain higher for longer. The biggest rise in rates was seen on the long end of the curve. The 10-year Treasury rose 69.3 bps to 4.532%, and the 30-year rose 78.6 bps to 4.648% during the quarter as of 9/25/23. You can see the complete Treasury curve changes for the 3 ^rd quarter in the chart below.

Source: Bloomberg

Spread volatility remained muted during the 3 ^rd quarter, with both IG corporates and taxable munis tightening. The spread on the Bloomberg US Corporate Bond Index tightened 7 bps to +116 bps, while the spread on the Bloomberg Taxable Muni US AGG Index dropped 10 bps to +96 bps as of 9/25/23. While having a longer duration than the benchmark hurt our performance during the quarter, the tightening spreads helped limit the downside. We continue to maintain a larger exposure to spread securities like corporates and taxable munis relative to the benchmark, with our largest exposure being taxable munis.

As we move into the 4 ^th quarter of 2023, we will look to continue increasing the book yield on portfolios by swapping out of lower-book-yield securities. There continues to be limited supply in the taxable muni space, but deals that are coming are pricing at attractive spreads. We expect that the volatility in the market will remain high until there is more clarity on when the Fed will stop raising rates. We will continue to take a conservative approach to credit while looking to be opportunistic as attractive deals come to market.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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