Published on February 3, 2021
Treasury yields continued to march higher in January, with the move again concentrated in longer maturities. Mortgage spreads tightened slightly, while corporate bond spreads were mostly mixed. The market remains stuck between the push/pull of the prospect for greater fiscal stimulus and ongoing vaccine rollout versus continued lockdowns and the greatest one-month mortality rate since the pandemic began nearly a year ago.
- The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) posted a negative return in January, falling 72 basis points. The majority of this loss stemmed from the rise in longer maturity Treasury yields. The MBS index (+0.08%) outperformed Treasuries (-0.96%) and corporates (-1.28%).
- Economic data continued to reflect broad improvement in the economy. While the headline unemployment number was unchanged at 6.7%, the broader underemployment index dropped 0.3% to 11.7% and average hourly earnings rose 0.8%. CPI rose 0.4% in the prior month, pushing the year-over-year number slightly higher to 1.4%. Housing starts and home sales accelerated, benefiting from low mortgage rates – both are at levels not seen since 2006.
- The Treasury curve resumed its bear steepening pattern, now seen in 5 of the last 6 months. While 2-year yields were little changed, the 5-year yield rose 8 basis points to 0.44%, the 10-year yield rose 18 basis points to 1.09% and the 30-year yield rose 21 basis points to 1.86%.
- Corporate spreads were little changed in January and remain relatively tight. The option-adjusted spread of the Bloomberg Barclays U.S. Corporate Index widened 1 basis point in January, ending the month at 97 basis points. Despite this widening, the corporate sector outperformed duration-matched Treasuries by 3 basis points, presumably from carry (yield).
- The Bloomberg Barclays U.S. MBS Index outperformed duration-matched Treasuries by 24 basis points. Despite the rise in Treasury yields, mortgage durations remained extremely low, owing to the moneyness of most of the index given the fall in mortgage rates. Lower coupon MBS (like 30-year FNMA 2%) continued to perform well, supported by Fed purchases. Current coupon MBS spreads tightened 4 basis points to 66 basis points, approaching their tightest levels over the past 8 years.
- The fund (-0.38%) outperformed the BC Agg (-0.72%) in January. Most of this outperformance is attributable to reduced duration profile relative to the index. Our overweight to MBS versus Treasuries also contributed to this outperformance.
Standardized performance can be viewed here: Monthly and Quarter End Performance
- Risk assets remain priced to perfection. To sustain these levels, Fed stimulus must continue unabated and the spread of the virus needs to decelerate. Fiscal stimulus would also be a welcome tailwind. January gave us mostly positive evidence on each of these fronts.
- We continue to favor a slight overweight to corporate bonds and MBS. Near-term risks include vaccine distribution challenges, broader and more draconian lockdowns, and a wider spread of the newly discovered (and more contagious) forms of Covid-19.
- Looking past the near term, we still believe any weakness in economic data or activity that may be observed this winter will be short-lived.
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The Morningstar Rating™ for funds, or “star rating,” is calculated for mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period has the greatest impact because it is included in all three rating periods.
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Opinions expressed are those of the author, are subject to change at any time, are not guaranteed and should not be considered investment advice.
Performance data quoted represent past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be higher or lower than the performance quoted. Performance data current to the most recent month end may be obtained by calling shareholder services toll free at (866) 236-0050.
The fund’s Gross Expense Ratio (as of 3/31/20) is 0.67%
The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) is an unmanaged index which is widely regarded as the standard for measuring U.S. investment grade bond market performance. This index does not incur expenses and is not available for investment. The index includes reinvestment of dividends and/or interest income.
The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.
The Bloomberg Barclays U.S. Corporate Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. The index includes exclusively corporate sectors, including Industrial, Utility, and Finance, which include both U.S. and non-U.S. corporations.
Sector returns above are those of the Bloomberg Barclays U.S. Aggregate Bond Index.
Mutual fund investing involves risk. Principal loss is possible. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities.” The Osterweis Total Return Fund may invest in fixed income securities which are subject to credit, default, extension, interest rate and prepayment risks. It may also make investments in derivatives that may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may invest in in debt securities that are un-rated or rated below investment grade. Lower-rated securities may present an increased possibility of default, price volatility or illiquidity compared to higher-rated securities. Investments in foreign and emerging market securities involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. Leverage may cause the effect of an increase or decrease in the value of the portfolio securities to be magnified and the fund to be more volatile than if leverage was not used. Investments in preferred securities have an inverse relationship with changes in the prevailing interest rate. Investments in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. It may also make investments in derivatives that may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may invest in municipal securities which are subject to the risk of default.
A basis point is a unit that is equal to 1/100th of 1%.
Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semiannually.
Investment grade bonds are bonds with high and medium credit quality assigned by a rating agency. For Standard and Poor’s, investment grade bonds include BBB ratings or higher. For Moody’s, the cutoff is Baa.
A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
Duration measures the sensitivity of a fixed income security’s price (or the aggregate market value of a portfolio of fixed income securities) to changes in interest rates. Fixed income securities with longer durations generally have more volatile prices than those of comparable quality with shorter durations.
Spread is the difference in yield between a risk-free asset such as a U.S. Treasury bond and another security with the same maturity but of lesser quality.
Option-Adjusted Spread is a spread calculation for securities with embedded options and takes into account that expected cash flows will fluctuate as interest rates change.
Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.
The producer price index (PPI) is a group of indices that calculates and represents the average movement in selling prices from domestic production over time.
It is not possible to invest in an index.
All investments involve risk. Principal loss is possible. Treasury notes are guaranteed by the U.S. government and thus they are considered to be safer than other asset classes.
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Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [OSTE-20210202-0145]