The Treasury curve flattened during the fourth quarter of 2021, with short-term Treasury yields rising precipitously while longer Treasury yields were slightly lower.
The largest increase in yield is seen in the 3-year, which is up 47.6 bps to 0.985% as of 12/29/21. The biggest decline in yield is seen in the 30-year Treasury, which is down 9.5 bps to 1.951% as of 12/29/21. You can see the complete movement in the Treasury curve in the table below.
|
Treasury |
9/30/2021 |
12/29/2021 |
Change |
|
2-Year |
0.277 |
0.752 |
47.5 bps |
|
3-Year |
0.51 |
0.985 |
47.6 bps |
|
5-Year |
0.966 |
1.283 |
31.7 bps |
|
7-Year |
1.287 |
1.442 |
15.4 bps |
|
10-Year |
1.488 |
1.529 |
4.1 bps |
|
20-Year |
1.99 |
1.982 |
-0.8 bps |
|
30-Year |
2.046 |
1.950 |
-9.6 bps |
Source: Bloomberg
As the Treasury curve flattened, we experienced the first signs of weakness in the spreads of investment-grade corporates and taxable municipals. As of 12/29/21, the Bloomberg Barclays US Agg Corporate Bond Index was up 9 bps for the quarter at +93 bps. Spreads on taxable municipals also approach the close of the quarter up, with the Bloomberg Barclays Taxable Muni US Agg Index up 8 bps at +95 bps. The wider spreads were driven by higher levels of inflation, volatility in the stock market, and concerns over more variants of COVID-19.
During the quarter, we continued managing the strategy with a shorter duration target between 4.00–4.50 while maintaining a defensive bias. We are still adding more defensive securities to the portfolios, including Treasury floaters and short, callable agencies, as we discussed in last quarter’s article. While we have shortened portfolios over the last couple quarters, we are still keeping a small weighting on the long end of the barbell. This strategy benefited portfolios during Q4 as long-term Treasury yields declined and short-term Treasuries rose in yield.
Going forward, we expect Treasury yields to rise as the FOMC increases the pace of tapering and expectations grow for rate hikes in 2022. We are looking to continue structuring portfolios defensively by maintaining shorter durations and taking a conservative approach to the current yield environment. We expect to maintain an increased weighting in defensive securities as outlined above while looking to take profits in securities that have benefited from tighter spreads.
Daniel Himelberger
Portfolio Manager & Analyst – Fixed Income
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