Published on April 6, 2021
Treasury yields marched higher in March, with the move again concentrated in longer maturities. While there have been some virus-related lockdowns (mostly in Europe) the general trajectory of news has been positive, with vaccine dissemination accelerating. Economic data was broadly positive. The White House has proposed a sweeping fiscal stimulus package funded by tax increases for corporations and individuals with high incomes.
- The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) posted its third consecutive negative return in March, falling -1.25%. A large portion of this loss stemmed from the rise in longer maturity Treasury yields. The MBS index (-0.51%) continued to post better returns than the other large investment grade sectors. The long duration profile of corporates (-1.72%) and Treasuries (-1.54%) weighed on their returns.
- Economic data continued to reflect improvement. The headline unemployment number dropped 0.1% to 6.2%. CPI rose 0.4%, and the year-over-year number climbed to 1.7%. Producer prices continued their sharp rise – PPI rose 0.5% for the month, pushing the year-over-year number to 2.8%. Weakness in some data (e.g. housing starts and building permits) was generally attributed to weather-related disruptions.
- The Treasury curve resumed its bear steepening pattern, now seen in 7 of the last 8 months. While 2-year yields only rose 1 basis point to 0.16%, the 5-year yield rose 16 basis points to 0.94%, the 10-year yield rose 29 basis points to 1.74% and the 30-year yield rose 24 basis points to 2.42%.
- Corporate spreads were little changed in March and remain relatively tight. The option-adjusted spread of the Bloomberg Barclays U.S. Corporate Index rose 1 basis point during the month, ending the month at 91 basis points. The corporate sector outperformed duration-matched Treasuries by 29 basis points.
- The Bloomberg Barclays U.S. MBS Index outperformed duration-matched Treasuries by 17 basis points. After a volatile February, mortgage spreads were relatively benign in March, as the market settled into a higher yield environment. Current coupon mortgage spreads finished the month at 70 basis points, nearly 3 basis points tighter than February’s close.
- The fund (-0.13%) outperformed the BC Agg (-1.25%) in March. The outperformance is attributable to a reduced duration profile, an underweight to Treasuries, and an overweight to MBS and corporates, which outperformed duration-matched Treasuries. Security selection within MBS and corporates also boosted relative returns.
Standardized performance can be viewed here: Monthly and Quarter End Performance
- We favor an overweight to MBS and continue to favor slightly higher coupons that are within the Fed’s purchase window (primarily 2.5s). We remain constructive on corporate bonds for the combination of modest carry and appreciation from spread tightening. Additional fiscal stimulus would provide a backdrop for further outperformance of risk assets, including corporate bonds (relative to Treasuries).
- Looking past the near term, we still believe any weakness in economic data or activity that may be observed will be short-lived. We expect interest rate volatility to remain elevated and will be keenly focused on inflation data as it emerges – including price indices, wages, and employment.
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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.
The Osterweis Funds are available by prospectus only. The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contain this and other important information about the Funds. You may obtain a summary or statutory prospectus by calling toll free at (866) 236-0050, or by visiting www.osterweis.com/statpro. Please read the prospectus carefully before investing to ensure the Fund is appropriate for your goals and risk tolerance.
Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [OSTE-20210405-0177]