Fixed income market update August 2021 - BMO Fixed Income 1001 Brickell Bay Dr. Suite 2100 Miami, Florida 33131 - BMO Global Asset ...
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Fixed income
market update
August 2021
BMO Fixed Income
1001 Brickell Bay Dr.
Suite 2100
Miami, Florida 33131
bmogam.com/USFixedIncomeFixed income market update
Fixed Income Sectors Total Returns
• For the month ended July 31, 2021, the 2.0
1.36
1.30
1.12
Bloomberg Barclays U.S. Aggregate Bond 1.5
0.93
0.70
0.63
Index returned 1.12%. Year to date, the index 1.0
0.43
0.39
0.20
has returned -0.50%.
0.01
0.5
(%)
0.0
-0.10
•
-0.15
U.S. Treasuries returned 1.36% during the -0.5
-0.50
month as the yield on the 10-year U.S. -1.0
-1.5
-1.25
Treasury declined to 1.22% at the end of July
from 1.47% at the end of June. For the month, -2.0
Treas. U.S. Agg. Agencies ABS CMBS MBS Credit
long Treasuries (+3.65%) outperformed 1-Mo YTD (07/31/2021)
Source: BBG Barclays
intermediate Treasuries (+0.78%.)
Fixed Income Sectors Excess Returns
200
• Mortgage-backed securities (MBS) returned (bps)
150
156
115
0.63% during the month, underperforming
100
Treasuries by 19 basis points on a duration-
50 35 37
adjusted basis. The option adjusted spread 28
2
(OAS) of the Bloomberg Barclays U.S. 0
-2
Mortgage Index widened 4 basis points during -50
-17 -13 -19
-38
the month, ending the period at 31 basis points. -64
-100
U.S. Agg. Agencies ABS CMBS MBS Credit
1-Mo YTD (07/31/2021) Source: BBG Barclays
2Fixed income market update (continued)
Subsector and Quality Total Returns
• Credit securities returned 1.30% for the month, 5.0
4.01
underperforming Treasuries by 38 basis points 4.0
on a duration-adjusted basis. The OAS of the 3.0
1.93
1.44
Bloomberg Barclays U.S. Credit Index ended
1.35
1.35
1.30
1.07
2.0
0.89
0.89
(%)
0.58
the period at 81 bps, 4 basis points wider than
0.38
0.18
0.10
1.0
at the end of June. 0.0
-0.29
-0.33
-0.45
-1.0
-0.59
-0.74
• For the month, financials delivered -23 basis
-2.0
points of excess return on a duration-adjusted Industrial Utility Financial Non-Corp Aaa Aa A Baa HY
Source: BBG Barclays
1-Mo YTD (07/31/2021)
basis, outperforming utilities, industrials and
non-corporates by 1, 22, and 22 basis points,
Subsector and Quality Excess Returns
respectively. 500
433
400
• AAA rated securities were the best performing
300
investment grade quality segment during the
219
198
month, delivering -14 basis points of excess
(bps)
200 165
138
117
return and outperforming AA, A and BBB rated 103
100 68
47
securities by 31, 23 and 27 basis points of
0
excess return, respectively. High yield delivered
-24 -14
-45 -45 -45 -37 -34
-34 basis points of excess return for the month. -100 -23 -41
Industrial Utility Financial Non-Corp Aaa Aa A Baa HY
1-Mo YTD (07/31/2021) Source: BBG Barclays
3Economic update
Consumer Price Index (YoY)
The consumer price index (CPI) rose 0.9% in June
and 5.4% for the trailing 12 months, the largest 6
increase since 2008. Core CPI, which excludes 5
food and energy, rose 0.5% for the month and 4.5% 4
Percentage (%)
3
for the trailing year, the largest increase since 1991.
2
Used car prices rose 10.5% for the month,
1
accounting for more than a third of the CPI increase
0
in June. For the past year, used car prices have -1
jumped 45.2%. Core PCE rose 0.4% for the month -2
and 3.5% for the trailing year, the largest increase -3
Jul 07
Jul 08
Jul 09
Jul 10
Jul 11
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Jul 18
Jul 19
Jul 20
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
in nearly 30 years.
CPI YOY Index
Gross Domestic Product (GDP) Source: Bureau of Labor Statistics
40
The advance estimate of second quarter GDP
30
showed strong economic growth of 6.5%, but was
20
Percentage (%)
well below the consensus estimate of 8.4%. The
10
second quarter increase brought total GDP above
0
the level prior to the COVID pandemic. Personal
-10
consumption grew at an 11.8% pace, highlighting
-20
the strength of the consumer, while net exports,
-30
government spending and domestic investment all
-40
reduced GDP. Drawdowns in inventories, typically
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
Sep 20
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Mar 19
Mar 20
Mar 21
viewed as positive for future growth, reduced GDP
Source: Bureau of Economic Analysis by 1.1% in the quarter.
4Market update
U.S. Investment Grade Corporate Spreads (weekly) U.S. High Yield Corporate Spreads (weekly)
4.00 12.00
3.50 10.00
3.00
8.00
OAS (%)
OAS (%)
2.50
2.00 6.00
1.50 4.00
1.00
0.50 2.00
0.00 0.00
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Dec 20
Mar 15
Jun 15
Mar 16
Jun 16
Mar 17
Jun 17
Mar 18
Jun 18
Mar 19
Jun 19
Mar 20
Jun 20
Mar 21
Jun 21
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
Sep 20
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Dec 20
Mar 15
Jun 15
Mar 16
Jun 16
Mar 17
Jun 17
Mar 18
Jun 18
Mar 19
Jun 19
Mar 20
Jun 20
Mar 21
Jun 21
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
Sep 20
Source: Bloomberg Barclays Source: Bloomberg Barclays
In July, corporates underperformed Treasuries on a duration matched High Yield has delivered positive returns for 10 consecutive months,
basis for only the second time since March of 2020. but CCCs had their first negative monthly return since March 2020.
Oil (WTI CRUDE FUTURE) 10 Year Treasury Yield
160 6.00
140
120
100 4.00
80
60
40 2.00
20
0
0.00
Dec 09
Jun 10
Dec 10
Jun 11
Dec 11
Jun 12
Dec 12
Jun 13
Dec 13
Jun 14
Dec 14
Jun 15
Dec 15
Jun 16
Dec 16
Jun 17
Dec 17
Jun 18
Dec 18
Jun 19
Dec 19
Jun 20
Dec 20
Jun 21
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Mar 19
Mar 20
Mar 21
Source: Bloomberg
Source: US Treasury
OPEC+ agreed to phase out production cuts over the course of the next After 10-year Treasury yields nearly doubled in Q1, rates have
year given the sharp rebound in oil prices since the onset of COVID. declined every month and are now 50 bps below that level.
5News & nuggets
Virus & Vaccine:
• The spread of the more contagious Delta variant has led to renewed concerns around COVID; some jurisdictions
have responded by re-imposing mask mandates and other restrictions.
• 58% of the U.S. population has received at least one dose of the vaccine, with 50% being fully vaccinated; this
represents an increase of 4% for each group since the end of June.
Unemployment:
• The June non-farm payrolls report showed the addition of 850,000 new jobs, beating the consensus estimate of
706,000. Despite the strong jobs report and the labor force participation rate being unchanged at 61.6%, the
unemployment rate increased 0.1% to 5.9%. The underemployment rate declined 0.4% to 9.8%, the first time below
10% since March 2020.
Earnings:
• As of the end of June, FactSet had projected second quarter earnings to grow 63.1% for the trailing twelve months.
With 59% of companies having reported, second quarter earnings are on pace for an 85.1% earnings growth rate.
Revenue growth is tracking at 23.1% for the second quarter versus the 19.4% projection at the end of June. For the
full year 2021, corporate earnings are projected to grow 40.7% with revenue growth of 13.9%.
Fiscal Policy:
• Over the final weekend of the month, a bipartisan group of Senators indicated they had finalized language for the
long discussed infrastructure bill. In addition to the infrastructure plan, Democrats hope to pass additional spending
via the reconciliation process, though additional negotiations within their caucus appear necessary.
• The two year period without a debt ceiling ended on July 31 at which point the debt ceiling was set at the current level
of debt. Though the Treasury has approximately $450 billion on hand, the government is likely to need additional
borrowings later in the year, which could create turbulence if not resolved.
6Outlook and conclusions:
Monetary policy:
• In Mid-July, Chairman Powell testified to congress and acknowledged that inflation has been “higher than expected and
hoped for,” but still viewed inflation as transitory, characterizing recent pricing pressures as a “shock going through the
system associated with the reopening of the economy.”
• At the July 27-28 Federal Open Market Committee, the Fed made no policy changes, but continued to shift their tone
marginally more hawkish after a similar approach at the June meeting and Powell’s congressional testimony. The
committee noted that the economy “has made progress” toward their goals and Chairman Powell confirmed that this
was the first meeting with significant debate around tapering of asset purchases. The Fed also announced two standing
repo facilities to address money market pressures.
Outlook:
• In our view, it is remarkable that after the first quarter, which was the worst for the Treasury index since 1980, it is now
conceivable that broad bond benchmarks could deliver positive returns for the year. The sharp reversal in rates has
played a key role, but if rates and spreads were to remain unchanged from here, income would carry the market to a
positive return. The second quarter decline in Treasury yields that continued into July is noteworthy given the contrast
versus the strong recovery that continues to unfold. Admittedly, growth underwhelmed very high expectations, but in
conjunction with improving corporate profits and employment, the economic picture remains robust. The diverging paths
of inflation and rates is striking, particularly as the difference has grown larger by the month. Inflation is not the sole
driver of rates though and concerns around the delta variant could negatively impact economic forecasts and weigh on
Treasury yields. Similarly, though the Fed continues to lean ever so slightly more hawkish each meeting, the central
bank remains quite accommodative, which continues to support markets broadly. We have noted the challenges
presented by valuations in non-governmental sectors; mild spread widening in July was favorable in this regard, though
these sectors are still not cheap. Opportunity, particularly at the idiosyncratic level, persists despite the challenges and
the continued value of income should not be overlooked.
7Fixed income returns as of July 31, 2021
Index Returns as of July 31, 2021
Total Return (% ) Excess Return (% )
Month-to-Date Year-to- Date Month-to-Date Year-to- Date
U.S. Aggregate 1.12 -0.50 -0.17 0.35
U.S. Treasury 1.36 -1.25 - -
Intermediate 0.78 -0.38 - -
Long 3.65 -4.56 - -
TIPS 2.67 4.44 - -
Agencies 0.70 -0.10 0.02 0.28
U.S. MBS 0.63 -0.15 -0.19 -0.64
ABS 0.20 0.39 -0.02 0.37
CMBS 0.93 0.43 -0.13 1.15
U.S. Credit 1.30 0.01 -0.38 1.56
Intermediate 0.76 0.21 -0.11 0.69
Long 2.21 -0.33 -0.84 3.08
Industrial 1.44 0.18 -0.45 1.98
Utility 1.93 -0.74 -0.24 1.65
Financial 1.07 0.10 -0.23 1.17
Non-Corporate 0.89 -0.45 -0.45 0.68
Aaa 0.89 -0.33 -0.14 0.47
Aa 1.35 -0.29 -0.45 1.38
A 1.30 -0.59 -0.37 1.03
Baa 1.35 0.58 -0.41 2.19
High Yield 0.38 4.01 -0.34 4.33
Floating Rate Notes 0.03 0.49 0.03 0.45
Source: Bloomberg Barclays
8Disclosures
All investments involve risk, including the possible loss of principal.
This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here
reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot
guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not
intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the
particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any
securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not
be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with
investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past
performance is not necessarily a guide to future performance.
Taplin, Canida & Habacht, LLC is a registered investment adviser and a wholly owned subsidiary of BMO Asset Management Corp., which is a
subsidiary of BMO Financial Corp. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide
investment management and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset
Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all
investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations.
BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO Asset Management Corp., BMO Private Bank, and BMO Harris Bank N.A. are affiliated companies. BMO Private Bank is a brand name used in
the United States by BMO Harris Bank N.A. Not all products and services are available in every state and/or location.
The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to
take into account an embedded option. Basis points (bps) represent 1/100th of a percent (for example: 50 bps equals 0.50%)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated,
fixed-rate taxable bond market. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index tracks fixed-rate agency mortgage backed pass-
through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Bloomberg Barclays U.S. Credit Index
measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US
Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supra-nationals and local authorities.
Investment products are: Not A Deposit | Not FDIC Insured | No Bank Guarantee | May Lose Value
©2021 BMO Financial Corp.
SCT #13277554
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