Treasury yields declined precipitously during the 4th quarter as the Fed’s dovish pivot during the December meeting led to the expectation that rate cuts will be coming earlier in 2024. The biggest decline was seen in the 3-year, which dropped 72.8 basis points to 4.074% as of 12/26/23. We also experienced significant declines in the 10- and 30-year Treasuries as they fell 66.9 basis points to 3.903% and 65.2 basis points to 4.05% respectively. These declines helped our strategy rebound after the 10- and 30-year peaked above 5.00% in October before rallying in November and December. You can see the complete Treasury curve changes for the quarter in the chart below.
Investment-grade corporates outperformed taxable munis as investors piled into the market, locking in yields ahead of potential rate cuts next year. The spread on the Bloomberg US Corporate Bond Index tightened 21 basis points to +100, while the spread on the Bloomberg Taxable Muni US AGG Index only dropped 2 basis points to +91 bps as of 12/26/23. We increased our exposure to corporates during the quarter to take advantage of the wider spreads relative to taxable munis, but still maintained a lighter weighting than the benchmark, which weighed on our performance as the corporate sector outperformed.
As we move into 2024, we will be looking to bring our portfolios more in line with the benchmark from duration and sector standpoints after the significant drop in yields. You can expect to see us continuing to increase IG corporate and Treasury exposure over time. Our goal is 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 advance into the new year. We will continue to take a conservative approach to credit while looking to be opportunistic as attractive deals come to market.
Daniel Himelberger
Portfolio Manager & Fixed Income Analyst
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