Bonds Perform Well in Risk-off Environment

Core bonds ended the first quarter with a gain of 2.81%. Corporate bonds widened during the quarter, which resulted in an underperformance versus Treasurys of 0.87%. Mortgage-backed securities (MBS) fared better and trailed Treasurys by just 0.07%. Over the last 12 months, the return on core bonds was 4.95%.

The 10-year Treasury began the quarter at 4.57% but fell 36 basis points. Lower yields were tied to falling equity prices, as fixed income provided diversification benefits during the quarter. The Federal Open Market Committee (FOMC) held the Federal Funds rate unchanged at 4.50%, but did note they would be biased to look through tariff-related inflation.

Economic data is starting to have a stagflation look, but for now the bond market is treating tariffs as overwhelmingly growth-negative, they are pushing prices up and yields down. So called “hard data” (retail sales and employment) are holding up, but consumer confidence and manufacturing surveys are much weaker.

  • The Citigroup Economic Surprise Index trended slightly lower in the quarter but remains near neutral.
  • The Conference Board Consumer Confidence Index’s future expectations component has gone from 93 in November to 65. The March reading was the lowest in 13 years.
  • Core PCE inflation posted its largest monthly gain in 13 months. It was also the second consecutive month with a 0.30% gain, following eight consecutive months under 0.30%.
  • ISM new orders fell to 45, from 55 just two months ago. This is the largest two-month drop since 2020. The employment component fell to 44.7 and has only had two months with a lower reading in the last 50 months.
  • This weak ISM growth outlook was paired with a price paid component that has gone from 50 in November to 69 in March.

Strategy Positioning

Our strategies are positioned neutral on duration with a preference to have lower exposure to the back end of the curve. The expectation is that there is a favorable risk/reward in positioning for the Treasury curve to steepen. The spread between the 5-year and 10-year Treasury widened by seven basis points during the quarter, while the spread between the 10-year and 30-year Treasury widened by 16 basis points.

Our strategies began the quarter cautious on corporate bonds, given starting spreads that offered little compensation for risks. The corporate positioning is slightly underweight to neutral. When paired with MBS, the total spread risk is neutral to slightly above benchmark. This is a cautious stance, especially relative to peers in the space. As of now, the strategies are operating as if the tariffs are a policy tool to reduce the deficit and enable permanent tax cuts. Therefore, there is no “Trump put” where a sufficiently large stock market drawdown causes him to cancel all tariffs. This is not a consensus view as many anticipate the tariffs being only negotiating tools or the President caving to the stock market. To get constructive on corporate bonds we would want to see signs from the White House of a pivot away from their tariff policy. We would also want to see the Fed acting aggressively into falling equity prices.

The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.