Total Return Perspectives: April 2021
Published on May 6, 2021
Treasury yields fell in April, in a modest retracement of the first quarter selloff. While virus outbreaks persist regionally, the general trajectory of news has been positive as vaccine dissemination continues. Economic data demonstrated continued growth as the economy emerges from last year’s pandemic depths.
Review:
- The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) posted its first gain of the year, rising 0.79%. The Corporate Index (+1.11%) topped the other major investment grade sectors, as spreads narrowed modestly. Despite tighter mortgage spreads, the MBS Index (+0.55%) trailed Treasuries (+0.75%) and Corporates, largely due to its shorter duration profile.
- Economic data continued to reflect improvement. The headline unemployment number dropped 0.2% to 6.0%. CPI rose 0.6%, and the year-over-year number climbed to 2.6%. Producer prices continued their sharp rise – PPI rose 1.0% for the month, pushing the year-over-year number to 4.2%.
- The Treasury curve took a breather from its bear-steepening trend, as long-maturity yields fell while short-maturity yields were little changed. The 2-year yield was unchanged at 0.16%, the 5-year yield fell 8 basis points to 0.86%, the 10-year yield fell 11 basis points to 1.63%, and the 30-year yield fell 12 basis points to 2.29%.
- The option-adjusted spread of the Corporate Index narrowed 3 basis points to 88 basis points in April. The corporate sector outperformed duration-matched Treasuries by 13 basis points.
- The MBS Index outperformed duration-matched Treasuries by 11 basis points. Mortgage spreads continued to narrow to levels that are significantly tighter than pre-pandemic levels, largely due to official purchases. Current coupon mortgage spreads finished the month at 59 basis points, over 10 basis points tighter than February’s close. These are the tightest levels seen since 2012, when the third bout of quantitative easing was initiated.
- The fund (+0.45%) underperformed the BC Agg (+0.79%) in April. The underperformance is primarily attributable to a reduced duration profile.
Standardized performance can be viewed here: Monthly and Quarter End Performance
Outlook:
- With mortgage spreads at their tightest levels in over 8 years, we have reduced our exposure in the sector. We remain constructive on ABS, non-agency MBS, and corporates. We believe these offer a combination of carry and modest potential for appreciation due to spread tightening.
- 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. The greatest potential for policy error stems from overstimulus and a persistent rise in inflation. We remain defensive in our duration exposure.
Eddy Vataru
Chief Investment Officer – Total Return
John Sheehan
Vice President & Portfolio Manager
Daniel Oh
Vice President & Portfolio Manager
Featuring
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.
John Sheehan
Vice President & Portfolio Manager
Prior to joining Osterweis Capital Management in 2018, John 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.
He is a principal of the firm and a Portfolio Manager for the total return fixed income strategy.
Mr. Sheehan graduated from Georgetown University (B.A. in Economics). Mr. Sheehan holds the CFA designation.
Daniel Oh
Vice President & Portfolio Manager
Prior to joining Osterweis Capital Management in 2018, Daniel 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 Mortgage Trading. 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, non-agency and whole loan mortgages, structured credit, and distressed investments.
He is a principal of the firm and a Portfolio Manager for the total return fixed income strategy.
Mr. Oh graduated from Columbia University (B.A. in Economics/Political Science) and from the Stephen M. Ross School of Business at the University of Michigan (M.B.A.).
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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 (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.
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.
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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.
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