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Q1 2024 Total Return Gov/Credit Review

Daniel Himelberger
Tue Apr 2, 2024

After a sharp decline in yield during the fourth quarter of 2023, Treasury yields rose during the first quarter of 2024 as “higher for longer” concerns reentered the market and rate-cut expectations declined from six 25-basis-point cuts to three. The biggest increase was seen in the 3-year, which rose 38 basis points to 4.39% as of 3/28/2024. We also experienced significant increases in the 10- and 30-year Treasuries as they rose 31 basis points to 4.19% and 30.6 basis points to 4.336% respectively. These increases gave us the opportunity to extend our duration to bring our strategy more in line with the benchmark duration. You can see the complete Treasury curve movements for the quarter below.

Source: Bloomberg

Spreads on investment-grade corporates and taxable munis continued to grind lower as Treasury rates rose, benefiting our strategy, as we remain overweight those sectors relative to the benchmark. The spread on the Bloomberg US Corporate Bond Index tightened 5 basis points to +90, while the spread on the Bloomberg Taxable Muni US AGG Index only dropped 14 basis points to +78 bps as of 3/28/2024. This resulted in both indexes currently trading around 52-week lows. We utilized this as an opportunity to start lowering our exposure to these spread securities and start increasing our exposure to Treasuries. Our expectation is that these spreads will eventually begin to widen and give us the opportunity to move back into the spread securities later in the year.

As we move into the second quarter of 2024, we will continue to keep a close eye on economic data, with a focus on inflation. Our long-term outlook continues to be lower rates, with an expectation that the Fed will start cutting rates in the second half of the year. You can expect to see us continuing to increase our Treasury exposure over time, as long as spreads remain at or near 52-week lows. Our goal will be to maintain a higher level of liquidity, allowing for more flexibility while making strategy adjustments going into an interest-rate environment that is expected to transition from tightening to loosening as we move later into the year. We will continue to take a conservative approach to credit while looking to be opportunistic if and when attractive trades become available.

Daniel Himelberger 
Portfolio Manager & Fixed Income Analyst 
Email | Bio



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