Surging Oil Prices Pull Treasury Yields Higher

Core bonds finished the first quarter with a modest loss of -0.5%. Rising yields, driven by renewed inflation concerns from the U.S. – Iran conflict, erased gains in the first half of the quarter. Corporate bond spreads widened by 11 basis points and given tight starting levels resulted in cumulative underperformance. The excess return was -0.48%. The mortgage sector fared better with modest outperformance versus Treasurys.

  • Treasury volatility picks up during the quarter.
  • Corporate bond dispersion is significant.
  • No changes to the Federal Funds rate.

The 10-year Treasury began the quarter at 4.16% and finished 16 basis points higher at 4.32%. Treasury yields remain in a three-year range; however, volatility has picked up. This quarter saw a range of 50 basis points from high to low. AI headlines hit several industries and raised doubts as to their future competitive positioning. Payroll growth has also been weak. Cumulative job gains over the last six months are now negative. These two forces combined to tip yields lower, but it was quickly reversed following actions in the Middle East. 

Corporate bond dispersion has been significant. This usually occurs if spreads widen sharply or when the overall index level is quite wide. In this case, the index level spread is low and stable, but single names are acting volatile. It is unusual to see BBB-Chemical companies outperforming A-rated names when both bond spreads and equity markets are a headwind.

  • AI vulnerable industries widened to start the quarter.
  • Private debt issues spilled over into asset managers.
  • Corporate spreads continue to closely track equity prices with a lag.

Strategy Positioning

Our strategies are positioned slightly underweight on duration from a secular standpoint. Commodity inflation has been a concern with the AI revolution despite anticipated energy advancements. Following recent actions in the Middle East, refined product prices have spiked. This has resulted in some chemical and transportation companies announcing immediate price increases. Aiding this view is the fact that global bond yields have been in a persistent rising trend. The Fed has re-emphasized their reluctance to hike into supply shocks, which is what the textbook says to do, but also what helped fuel inflation in 2022 when it peaked over 9%. 

Our proprietary strategies are neutral on corporate bonds given elevated economic and policy uncertainty. Spreads have been well contained amid the equity pullback but tend to act like a rubber band, making them prone to cracking wider if the equity drawdown exceeds 10%. Since spreads are still tight, we aren’t giving up much to put an emphasis on risk management.

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.