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Over Q2 2020, the LOM USD Fixed Income Fund achieved a net total return of 3.38% while its stated benchmark, the FTSE U.S. Investment Grade Government/Credit Bond Index returned 1.88%. The Fund benefitted from an overweight exposure to corporate versus sovereign credit as spreads compressed during the period. In the second quarter, credit markets recovered modestly from an earlier sell off as risk market sentiment began to improve on the back of massive government support and monetary stimulus. The U.S. alone has plowed at least $3 trillion into the system and has agreed to continue buying both government and corporate securities.
Against this backdrop, corporate spreads continued to tighten in the second quarter since the Federal Reserve announced its Emergency Lending Program in late March. The spread between the BBB rated bonds and the ten-year treasury has narrowed by more than 1% to 1.73% as of end of June. The announcement of the Fed’s program alone boosted confidence in investors. Most of the $2.6 trillion available through the Fed’s eleven emergency facilities remain untapped, as local governments and businesses were able to secure financing through the debt market.
The Treasury yield curve steepened slightly with medium term yields moved lower while long term yields increased. Central banks around the world have shown commitments to a “whatever-it-takes” approaches to support the economy. Fed Chairman Jerome Powell has indicated the policyholders’ plan to maintain the target rate at zero until the economy fully recovers.
Despite the black swan events which have occurred so far in this tumultuous year, we remain optimistic about the future. While credit spreads have narrowed, we continue to find attractively price securities across the curve and remain buyers of investment grade paper on weakness. Some of our more controversial credits are in the travel and leisure sector and we own a few asset-backed securities which have fallen out of favor in the near term. However, we continue to make regular decisions on these and other credits while staying close to our analyst community.
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.
