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Despite investor fears of an economic slowdown or possibly recession this past quarter, credit spreads managed to tighten during the period and that benefitted the Fixed Income Fund. Over Q1, the Fund achieved a net total return of 2.69% which compares favorably to the return of 1.77% on its stated benchmark, the Citigroup 1-5 Year Government Corporate Bond Index and represents outperformance of 1.77%. For the past three years through the end of March, the Fund provided a total return 7.98%, or 2.60% annually compared to the return of 4.42%, or 1.46% annually on the benchmark.
In the early part of Q1, Fed Chairman Jerome Powell signaled the Federal Reserve would not raise interest rates again until the Fed saw inflation accelerating. He also dropped reference to his prior declaration of “further gradual increases” and indicated a “flexible” approach to shrinking the government balance sheet.
His more recent statements were broadly interpreted as setting a more “dovish” policy stance than last year. After nine successive increases in the Federal Funds rate since 2015, the central bank implied the next rate move could just as likely be down. Immediately following what is now known as the “Powell pivot” bond markets rallied into quarter end. The benchmark ten-year Treasury yield fell by 28 basis points, from 2.68% to 2.40% over the period.
In March, the U.S. yield curve became inverted for the first time since 2007 with yields on three-month Treasury Bills briefly offering a higher yield than the ten-year government bonds. While some investors saw this as a sign of an imminent recession, we note that much of the price action in longer-dated U.S. bonds was driven by overseas markets. Specifically, ten-year German Bund yields fell below zero percent for the first time since 2016. Lower rates in Europe undoubtedly pushed U.S. Treasury yields lower despite relatively mixed American economic data which so far suggests more of a slowdown than recession.
On a strategic basis, the Fund continues to maintain its overweight to the corporate fixed income sector while looking for opportunities on an issue and credit specific basis. In recent weeks we have been taking profits in the baby bond and preferred subsectors we bought in December. Our initial purchases have begun to pay off and we have been receiving substantially higher prices than our original costs in addition to having collected better-than-market coupons.
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.
