Published on September 7, 2021

U.S. Treasuries ended their 4-month streak of positive returns and falling yields in August. Intermediate maturity yields rose more than shorter and longer maturities, as the market began to see through the impact of the Delta variant and focus more on the Federal Reserve’s plan to scale back their bond buying program.

Review:

  • The Bloomberg U.S. Aggregate Bond Index (BC Agg) returned -0.19% in August, its first negative return in five months. The Bloomberg U.S. Corporate Index (-0.30%) led the major investment grade sectors lower as duration weighed on returns. Treasuries (-0.18%) also broke their positive streak as the yields rose across the curve. Mortgage-backed securities (MBS) edged out a small victory as the best performer (-0.16%) largely due to their shorter duration.
  • The latest headline CPI came in at 5.4% year-over-year (with core CPI at 4.3%), once again exceeding the Fed’s 2.0% long-term target. With each passing month that CPI data surpasses the Fed’s target, it becomes more difficult to dismiss the trend as just “transitory.” However, Fed Chair Powell successfully assuaged the market’s inflation concerns at his Jackson Hole speech. As discussed in the past, we are closely monitoring this market risk.
  • While Treasury yields rose across the maturity spectrum, the “belly” of the yield curve sold off the most. The 2-year yield rose 2 basis points to 0.21%, the 5-year yield increased 7 basis points to 0.77%, the 10-year yield gained 6 basis points to 1.30%, and the 30-year yield tacked on 3 basis points to 1.93%.
  • The option-adjusted spread of the Corporate Index widened 1 basis point in August to 87 basis points. Corporate spreads widened on higher-than-expected supply early in the month but recovered on month-end buying.
  • The Bloomberg U.S. MBS Index underperformed duration-matched Treasuries by 3 basis points as spreads for the sector widened 3 basis points in August.
  • The fund (+0.06%) outperformed the BC Agg (-0.19%) in August. The outperformance is mostly attributable to a reduced duration profile and contributions from sector rotation and security selection.

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

 

Outlook:

  • We are exiting a seasonally slow time in the market, but the period after Labor Day has historically experienced elevated volatility. Treasury yields are benefitting substantially from Fed buying and even if inflation moderates from here, Treasury yields are too low for this point in the inflation cycle. The Fed settled the market’s nerves in August but the combination of elevated inflation with a looming taper keeps us on alert.

 

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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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 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 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 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 (IG 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.

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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.

The Job Openings and Labor Turnover Survey (JOLTS) program produces data on job openings, hires, and separations.

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