March 31, 2020
Fixed income has, for the most part, enjoyed a 30-year rally. Generally, fixed income sectors' returns are inversely related to U.S. Treasury rates. As Treasury rates decline, fixed income returns will rise if all factors are equal. This was true for 2019, but not necessarily true for the first quarter of 2020.
The 10-year Treasury was about 9 percent back in 1990 and is now about 0.67 percent as a result of the recent COVID-19-based economic downturn. This led to a “flight to quality” where investors sought the safety of cash and Treasury securities. However, not all fixed income rallied. Sectors such as corporate bonds were negatively affected due to expectations for decreasing corporate earnings. For the quarter, the Bloomberg Barclays U.S. Aggregate Index increased 3.15 percent (primarily driven by U.S. Treasury performance) while the Intermediate Corporate Bond Index declined by 3.15 percent (primarily driven by concerns over corporate earnings).
The COVID-19 global pandemic prompted the Federal Reserve (Fed) to make dramatic changes to interest rates. They had indicated that, pending changes in inflation, they would leave rates unchanged in 2020. However, due to the crisis, they have now lowered rates to effectively zero. As a result, interest rates dropped across the Treasury yield curve for the quarter with rates dropping over 100 basis points over the entire 1 month maturity to the 30 year maturity range with some yields dropping to long-term lows. The 1-month Treasury Bill (the ultra-short part of the Treasury yield curve) actually had negative rates for part of the quarter due to the very strong demand for cash-like instruments. The decreased global outlook pushed longer interest rates lower with the 10-year Treasury dropping 125 basis points to 0.67 and the 30-year dropped 107 basis points to 1.32.
As Treasury securities rallied in price, other securities tied to the decrease in the economy such as corporate bonds dropped in price. Corporate earnings, GDP, and housing estimates are all being reevaluated for expected effects on credit sectors and mortgage-based product.
Looking ahead, we believe that the timing and outcome of the COVID-19 pandemic is still in play, but we are hopeful for a positive resolution affecting fixed income.
The views expressed herein are the current views of Miles Capital as of the stated date and are provided for informational purposes only. They are believed to be correct, but accuracy and completeness cannot be guaranteed and should not be relied upon for legal or investment decision purposes. All expressions of opinion and predictions presented are subject to change without notice. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is not a guarantee of future results.