- Investors’ exuberance regarding imminent interest rate cuts soured in April as the US economy remained resilient and inflation data came in hotter than expected. Federal Reserve (Fed) officials responded with a smattering of commentary that cast doubt on the Fed’s ability to cut rates in the near term. US Treasuries (USTs) sold off and yields spiked. The 2-Year, 10-Year and 30-Year UST yields increased by 42, 48 and 44 basis points (bps) during the month, respectively.
- Market expectations regarding interest rate cuts shifted drastically, with futures markets currently pricing in an approximately 8% chance of a cut in June, down from 60% at the end of March. The market’s consensus of the timing of the first cut was also pushed from June to December.
- According to Bloomberg US Aggregate index data, performance among Investment Grade (IG) spread sectors was mixed. Corporate credit outperformed USTs, with spreads continuing to grind tighter despite a record amount of issuance year-to-date (YTD). The increase in yields attracted “yield buyers”, especially at the long end of the curve. From our perspective, 30-year IG corporate credit spreads are exceptionally rich.
- ABS modestly outperformed USTs. ABS spreads have tightened meaningfully YTD, somewhat diminishing the relative value that the sector offered at the beginning of the year. The market priced over $27 billion of new issues during the month. Most deals were oversubscribed, but not to the same degree that we observed in the first quarter given tighter spreads and smaller new issue concessions.
- Agency RMBS underperformed USTs. The sector was once again hampered by increasing interest rates and rate volatility. Spreads widened across the board, with the 15-Year and 30-Year basis increasing by approximately 10 and 8 bps, respectively.
- CMBS also underperformed USTs. Spreads for the more credit sensitive non-Agency subsector reversed some of their first quarter rally, while Agency spreads tightened. There was a technical element to both of those moves, as non-Agency issuance is up 172% and Agency issuance is down 2% year-over-year.
