Published on March 4, 2021

Treasury yields rocketed higher in February, with the move again concentrated in longer maturities. Volatility spiked as liquidity dried up in the Treasury market, especially after a very weak 7-year auction that briefly pushed 10-year Treasury yields to 1.60%. The news flow was largely the same direction: an improving economy, increased vaccine rollout with deaths and hospitalizations turning sharply lower, and a continued march toward a substantial fiscal stimulus plan.


  • The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) posted a negative return in February, falling -1.44%. A large portion of this loss stemmed from the rise in longer maturity Treasury yields. The MBS index (-0.67%) posted a better return than corporates (-1.72%) and Treasuries (-1.81%), due to its lower duration profile.
  • Economic data continued to reflect broad improvement. The headline unemployment number dropped 0.4% to 6.3%, the broader underemployment index dropped 0.6% to 11.1%. CPI rose 0.3% in the prior month, with the year-over-year number unchanged at 1.4%. Producer prices rose sharply – PPI rose 1.3% for the month, though the year-over-year number remained a relatively tame 1.7%. Retail sales also improved sharply, painting a reflation narrative as it seems the worst of the pandemic might finally be behind us.
  • The Treasury curve resumed its bear steepening pattern, now seen in 6 of the last 7 months. While 2-year yields only rose 3 basis points to 0.14%, the 5-year yield rose 33 basis points to 0.77%, the 10-year yield rose 36 basis points to 1.45% and the 30-year yield rose 33 basis points to 2.18%.
  • Corporate spreads narrowed in February and remain relatively tight. The option-adjusted spread of the Bloomberg Barclays U.S. Corporate Index fell 7 basis points during the month, ending the month at 90 basis points. The corporate sector outperformed duration-matched Treasuries by 65 basis points, although corporates did post one of the worst absolute returns among the major components of the Aggregate index due to their increased duration exposure.
  • The Bloomberg Barclays U.S. MBS Index trailed duration-matched Treasuries by 26 basis points. The sharp rise in mortgage yields caused durations to extend sharply in February. However, as convexity events go, this one did not feature the dramatic widening seen in prior selloffs, and mortgages themselves did not drive the majority of the bear steepening rate move, which is attributable to a reflation trade seen in markets across the globe.
  • Higher coupon MBS outperformed lower coupon MBS, as prepay fears abated and lower coupon MBS durations extended sharply during the selloff. Current coupon MBS spreads narrowed 3 basis points in the first six trading sessions of the week, then proceeded to widen by nearly 25 basis points between February 8 and February 25 (the day of the weak 7-year auction). A massive recovery on the last day of the month found current coupon mortgage spreads at 72 basis points by month’s end, for a widening of just 5 basis points over the month.
  • The fund (-1.38%) slightly outperformed the BC Agg (-1.44%) in February. Most of this outperformance is attributable an underweight in Treasuries, although this was offset by the relatively long duration profile across the portfolio.

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



  • The shakeup in February left mortgages at very attractive valuations relative to corporates, although the sharp recovery on the final trading day of the month reduced this disparity.
  • We favor an overweight to MBS, and are looking to move into slightly higher coupons that are within the Fed’s purchase window (2s and 2.5s). We remain constructive on corporate bonds primarily for carry rather than significant appreciation.
  • 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. We certainly didn’t observe any weakness in February, and the lows reached last March will improve the optics of the economic recovery this March. We expect interest rate volatility to remain elevated, as inflation fears have certainly gripped the fixed income market.


Eddy Vataru

Chief Investment Officer – Total Return

John Sheehan

Vice President & Portfolio Manager

Daniel Oh

Vice President & Portfolio Manager

Written by

Eddy Vataru

Chief Investment Officer – Total Return

Eddy Vataru

Chief Investment Officer – Total Return

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

Prior to joining Osterweis Capital Management in 2016, Mr. 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), 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.

Over the course of his career as a fixed income investor, Mr. Vataru has developed extensive experience in managing passive, active and hedge fund portfolios.

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

John Sheehan

Vice President & Portfolio Manager

John Sheehan

Vice President & Portfolio Manager

John Sheehan graduated from Georgetown University (B.A. Economics). Mr. Sheehan holds the Chartered Financial Analyst designation.

Prior to joining Osterweis Capital Management in 2018, Mr. Sheehan spent more than 20 years working at Citigroup, first as Managing Director responsible for Investment Grade Syndicate in New York City, where he advised issuers on accessing funding in the corporate bond market. Later at Citigroup, he was Managing Director in charge of West Coast Investment Grade Sales in San Francisco, where he covered several of the largest U.S. investment grade credit investors.

Mr. Sheehan is a principal of the firm and a Portfolio Manager for the total return fixed income strategy.

Daniel Oh

Vice President & Portfolio Manager

Daniel Oh

Vice President & Portfolio Manager

Daniel Oh graduated from Columbia University (B.A. Economics/Political Science) and from the Stephen M. Ross School of Business at the University of Michigan (M.B.A.).

Prior to joining Osterweis Capital Management in 2018, Mr. Oh spent over eight years as a Director at Estabrook Capital Management in New York City and was the lead Portfolio Manager of the Estabrook Investment Grade Fixed Income Fund. Before that he was at Merrill Lynch & Co. as an Associate in Prime/Alt-A-Non-Agency. Prior to that he held positions at Seneca Financial Group and Morgan Stanley.

Mr. Oh’s professional history includes experience in investment grade corporate credit, whole loan mortgages, structured finance and distressed investments.

Mr. Oh is a principal of the firm and a Portfolio Manager for the total return fixed income strategy.

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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 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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