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.
- 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
- 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.
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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.
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-20210504-0214]