- On December 18th, the Federal Reserve (Fed) cut interest rates by 25 basis points (bps), ending the year at a target range of 4.25% – 4.50%. Notably, the latest projections revealed that Fed officials expect higher Core PCE and fewer rate cuts in 2025. US Treasury (UST) yields 1-year and shorter declined, while those 2-years and longer increased. The 2-year, 10-year and 30-year UST yields increased by 9, 40 and 42 bps for the month, respectively.
- Corporate credit underperformed like-duration USTs by 2 bps during December. Utilities and industrials modestly outperformed, while financials underperformed. Spreads leaked wider amid increased M&A/corporate actions activity and concerning headlines regarding several issuers. Market participants hesitated to “buy the dip”, especially given reduced liquidity due to the typical holiday slowdown.
- Among securitized sectors, CMBS was the star performer in December, outperforming USTs by 16 bps. Agency and Non-Agency CMBS outperformed by 3 and 29 bps, respectively. Following a historically poor 2023 for excess returns, CMBS spreads rebounded throughout 2024 amid a mix of mean reversion, improving liquidity from growing issuance, strong economic data and optimism for 2025.
- ABS outperformed USTs by 6 bps. Spreads tightened modestly, largely due to light new issue supply of approximately $5 billion. Demand for the sector remained strong throughout the year despite tightening spreads. In line with prior years, autos accounted for slightly more than half the $338 billion of 2024 new issuance.
- Agency RMBS underperformed USTs by 17 bps, with relative performance turning on a dime following the Fed meeting, which sparked an increase in both the level and volatility of interest rates, hurting performance.
