Published on October 6, 2021
U.S. Treasury yields continued to rise during September as the Federal Reserve prepared markets for an eventual tapering of its quantitative easing program and inflation data remained elevated. Corporate bond spreads were resilient despite the rise in equity volatility.
- The Bloomberg U.S. Aggregate Bond Index (BC Agg) returned -0.87% in September, extending losses from the previous month. Treasuries (-1.08%) were the worst performing investment grade sector as yields increased across the curve. The Bloomberg U.S. Corporate Index (-1.05%) also had a difficult month as the sector remains exposed to higher rates due to its longer duration profile. Mortgage-backed securities (MBS) (-0.36%) performed the best as they benefited from a shorter duration and tighter spreads.
- The latest headline CPI came in at 5.3% year-over-year (with core CPI at 4.0%), which was slightly lower than last month but still well in excess of the Fed’s 2.0% long-term target. Investors continue to hear reports from corporations describing elevated costs due to supply disruptions and labor shortages, creating margin pressure and forcing some to raise prices. It appears that the current inflationary cycle may remain in play for longer than initially anticipated.
- Treasury yields rose across the maturity spectrum as the market readjusted expectations for a tapering of quantitative easing. The 2-year yield rose 8 basis points to 0.29%. The 5-year yield increased 22 basis points to 0.99%. The 10-year yield climbed 23 basis points to 1.53%, and the 30-year yield increased 16 basis points to 2.09%.
- The option-adjusted spread of the Corporate Index tightened 3 basis points in September to 84 basis points and is now only 4 basis points wide of the year-to-date tights. Investment grade corporate spreads remained resilient despite heavy issuance (over $158 billion in September) and elevated equity volatility.
- The Bloomberg U.S. MBS Index outperformed duration-matched Treasuries by 24 basis points as spreads for the sector tightened 5 basis points in September.
- The fund (-0.35%) outperformed the BC Agg (-0.87%) in September. The outperformance is attributable to the shorter duration profile and lower exposure to Treasuries in addition to the spread tightening in both corporate and mortgage sectors.
Standardized performance can be viewed here: Monthly and Quarter End Performance
- We remain defensive with a lower duration profile as we continue to believe that elevated inflation levels will be more persistent than what is currently being recognized by the market. We have trimmed some of our corporate names based on valuation, although we are optimistic about the sector as cases of the Delta variant continue to fall. We will look to add to our corporate position as opportunities present themselves.
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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 3/31/21) is 0.70%
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 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.
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 (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.
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.
The Job Openings and Labor Turnover Survey (JOLTS) program produces data on job openings, hires, and separations.
Treasury inflation-protected securities (TIPS) are a type of Treasury security issued by the U.S. government that are indexed to inflation in order to protect investors from a decline in purchasing power.
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-20211004-0332]