Published on March 2, 2020

The Treasury rally intensified in February, driven by the global spread of the coronavirus.

February 2020 Review:

  • The Treasury rally intensified in February as cases of the novel Wuhan Coronavirus began to spread rapidly outside of China. Economic data began to reflect some weakness – especially in China – suggesting a global slowdown is taking hold.
  • The 10-year Treasury yield fell 40 basis points (0.40%) for a second consecutive month, from 1.52% to 1.12%. Shorter maturity Treasury yields actually fell even further, as market participants began to discount probable Federal Reserve (Fed) action. At present, two rate eases (50 basis points) are priced at (or before) the March 18 FOMC meeting.
  • Treasuries returned 2.65% in February, bringing the year to date return to 5.16%.
  • Corporate spreads widened sharply. The corporate sector underperformed duration-matched Treasuries by 176 basis points, as the option-adjusted spread of corporates rose 20 basis points to close February at 122 basis points.
  • Mortgages fared much better, as the sector delivered just 7 basis points of negative performance versus duration-matched Treasuries.
  • Despite underperformance versus Treasuries, corporates and mortgages still delivered positive absolute returns (1.34% and 1.04% respectively).
  • We reduced our corporate and Treasury exposure in the portfolio in mid-February, adding some exposure to 15-year MBS later in the month. We also reduced our duration exposure to near zero by the end of the month.
  • The portfolio (+0.16%) underperformed the Bloomberg Barclays U.S. Aggregate Bond Index (+1.80%) in February, primarily due to its reduced duration exposure and its continued underweight in Treasury securities relative to the benchmark.

Standardized performance can be viewed here: Monthly and Quarter End Performance



  • The outbreak of the coronavirus has continued to spread globally, and we do not appear any closer to a curative resolution. We expect coordinated central bank action to ease financial conditions, recognizing that this simply addresses risk market concerns.
  • We continue to respect the flight to quality bid for Treasuries as a trade – in particular for shorter maturities that will be directly impacted by Fed policy. Longer maturity Treasuries (10+ years) do not offer any long-term investment value here, with yields approaching 1% on 10-year Treasuries. We prefer to stay defensive with respect to duration, and we look to continue reducing our Treasury exposure and add MBS at potentially wider spreads.

Eddy Vataru

Chief Investment Officer – Total Return


Eddy Vataru

Chief Investment Officer – Total Return

Eddy Vataru

Chief Investment Officer – Total Return

Prior to joining Osterweis Capital Management in 2016, Eddy Vataru worked in senior management positions at Incapture, LLC and Citadel, LLC. Before that he spent over 11 years at BlackRock (formerly Barclays Global Investors, BGI), where his last position was as Managing Director and Head of U.S. Rates and Mortgages. While in this role, BGI worked with the U.S. Treasury in implementing its Agency MBS Purchase Program, buying mortgages for the U.S. government from 2008-2009.

He is a principal of the firm and the lead Portfolio Manager for the total return fixed income strategy. Mr. Vataru is also a Portfolio Manager for the growth & income and flexible balanced strategies.

Mr. Vataru graduated from California Institute of Technology (B.S. in Chemistry & Economics) and from Olin Business School at Washington University in St. Louis (M.B.A.). Mr. Vataru holds the CFA designation.

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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.

FOMC refers to the Federal Open Market Committee.

The Bloomberg U.S. Aggregate Bond Index (Agg) is an unmanaged index that 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.

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.”

A basis point is a unit that is equal to 1/100th of 1%.

TIPS refer to Treasury Inflation Protected Securities.

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.

The Federal Funds Rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis.

In the money is a term used to indicate that an option has a strike price that is favorable in comparison to the prevailing market price of the underlying asset.

Out the money is a term used to indicate that an option has a strike price that is unfavorable in comparison to the prevailing market price of the underlying asset.

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Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [44131]