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Over the third quarter of 2020, the LOM USD Fixed Income Fund achieved a net total return of 1.97% while its stated benchmark, the FTSE U.S. Investment Grade Government/Credit Bond Index returned 0.44%, exceeding its benchmark by 153 basis points.
The bond market remained relatively stable in the third quarter after a volatile first half of the year. The Treasury yield curve continued to steepen slightly with short term yields moved lower and long-term yields rising. Corporate spreads continued their tightening trend in July and then flattened in August and September. Overall, the spread between the BBB rated bonds and the ten-year Treasury has narrowed by about 20 basis points during the third quarter.
During the annual Jackson Hole Symposium in August, Fed chairman Jerome Powell adopted a dovish tone on policy outlook. Powell announced the change to the committee’s policy statement on inflation, where they will allow inflation to run above 2% once the economy improves. The Fed intends to maintain the long-term average of 2% price increases. Powell’s shift in his stance on inflation signals that interest rates will likely remain low for many years. In both the July and the September FOMC meetings, policyholders voted to maintain the Fed Fund target rate at the 0 to 25 basis point range.
In addition to better bids on many of our existing corporate bond issues, the Fixed Income Fund also benefited from rebounding prices in the preferred and $25 par sector. Most of our corporate bonds and $25 par securities appreciated in value due to improving risk appetite against the backdrop of a relatively stable interest rate environment and improving fundamentals. With yields now looking lower for longer, call features have become more critical in analyzing securities and we have experienced a larger than normal volume of redemptions in recent months.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
