Calmer, But Not Calm

Mid Week Bond Update

Calmer, But Not Calm

For the past week, fans of fixed income as a safe haven seemed vindicated. While volatility ebbed and flowed in the midst of trade tirades...


... measures of bond volatility remained relatively tranquil. A brief look at the volatility picture before and after the trade salvos were fired is instructive; while the U.S. based VIX volatility index spiked on Monday, February 6, the volatility of 10-year U.S. Treasuries, as measured by the CBOE 10-year U.S. Treasury Volatility Index, moved only slightly. In fact, by the end of trading on April 10, the Treasury volatility index had actually fallen, down -0.71 points since February 2. The VIX, however, remained elevated, closing on April 10 at 20.47. It’s notable that the Euro Stoxx 50 Volatility Index, while also spiking on February 6 and 9th, ended the period roughly where it began, at 16.31.

 

Source: Bloomberg, April 11, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


On the Rise
:  Risk-on fixed income in Q1

In terms of absolute return, the first quarter rewarded risk-on investors. The best-performing main-stream sector, Global emerging market U.S. dollar denominated corporates, rose 4.4%, benefitting from a weakening dollar. Also on the risk-on side were U.S. Non-agency residential mortgage-backed securities (RMBS), up 3.5%, followed by local-currency EM, U.S. loans, and European asset-backed securities (0.35%).

 

Source: Bloomberg, April 10, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


The laggards ranked roughly in increasing order of risk, starting with U.S. corporates, down -2.32%, followed by EM U.S. dollar government bonds, the benchmark Barclays U.S. Aggregate Index and US mortgage-backed securities (MBS), -2.04%, -1.46%, and 1.19% respectively.
 

On the Slide: High Yield Spreads, Thanks to Crude

Another week of falling HY spreads in the U.S. in the face of the tariff tiff – this time due to the rally in crude oil.

 

Source: Bloomberg, April 10, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


Between February 4 and 10, Brent Crude oil rose about 6.5% from its intra-day highs and lows, from $66.88 to $71.24 (West Texas Intermediate Crude rose 5.7% during the same period)

The connection: the debt-hungry oil field exploration and production (E&P) business is driven by supply and demand for oil – and the supply and demand for credit. As the price of crude oil rises, the ability of E&P companies to tolerate debt skyrockets, despite the general rising-rate environment. As for what’s driving the sudden rise in oil prices, the usual factors apply: OPEC’s ability to enforce its own rules, the prospect of increased gasoline consumption as the U.S. faces the prospect of decreased emissions regulation on cars and refineries, and the like. Increasing military tension in the Middle East and the new sanctions on Russia could be factors as well; but with the U.S. rapidly becoming the world’s largest producer of oil, one  important source of nervousness about scarcity seems much diminished.

 


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