The Federal Reserve aims to be as transparent as possible with investors, but have been very quick to adapt to evolving economic data over the past several years. As Brad mentioned above, inflation has not come down as much as the Fed hoped. Coupled with continued strength in the labor market, this pushed the Fed back towards a “higher for longer” stance on rates and as of this writing, led to a slight pullback in equities. We mentioned in the last bulletin that the market was pricing in as many as six rate cuts in 2024. With the shift in Jay Powell’s tone, the number of cuts projected for the remainder of the year sits between one and two cuts. These cuts are not projected to happen until the 4th quarter.
This shift lifted all interest rates higher. Due to the inverse relationship between bond prices and interest rates, the Bloomberg Aggregate returned -0.78% for the 1st quarter. The 2-year and 10-year Treasury rates ended the quarter higher with the 2-year finishing at 4.62% and the 10-year finishing the quarter at 4.20%. This surge in rates has continued into the 2nd quarter as well, with the 2-year trading at 5.00% and the 10-year trading at 4.71% as of this writing. Longer bonds increased slightly more than shorter bonds, decreasing the spread between the 2- and 10-year Treasuries to 0.29%. The spread between investment grade corporate bonds and treasuries began the year at 0.98%. The high yield spread began at 3.23%. These spreads narrowed in the 1st quarter to end at 0.90% and 2.99% respectively. Current spreads reinforce our view that investors are not being adequately compensated for taking on credit risk.
With broadening geopolitical risk, issue selection and active management in the international fixed income markets is increasingly important. Consequently, we have shifted our emerging market debt exposure from a passive ETF into an active fund: EIDOX, Eaton Vance Emerging Market Debt Opportunities Fund. Eaton Vance’s bottom-up approach to security selection will be fundamental in taking advantage of emerging market fixed income inefficiencies. Given the positive real return on bonds amidst the uncertainty elsewhere, we continue to recommend an overweight to bonds in our portfolios.
This shift lifted all interest rates higher. Due to the inverse relationship between bond prices and interest rates, the Bloomberg Aggregate returned -0.78% for the 1st quarter. The 2-year and 10-year Treasury rates ended the quarter higher with the 2-year finishing at 4.62% and the 10-year finishing the quarter at 4.20%. This surge in rates has continued into the 2nd quarter as well, with the 2-year trading at 5.00% and the 10-year trading at 4.71% as of this writing. Longer bonds increased slightly more than shorter bonds, decreasing the spread between the 2- and 10-year Treasuries to 0.29%. The spread between investment grade corporate bonds and treasuries began the year at 0.98%. The high yield spread began at 3.23%. These spreads narrowed in the 1st quarter to end at 0.90% and 2.99% respectively. Current spreads reinforce our view that investors are not being adequately compensated for taking on credit risk.
With broadening geopolitical risk, issue selection and active management in the international fixed income markets is increasingly important. Consequently, we have shifted our emerging market debt exposure from a passive ETF into an active fund: EIDOX, Eaton Vance Emerging Market Debt Opportunities Fund. Eaton Vance’s bottom-up approach to security selection will be fundamental in taking advantage of emerging market fixed income inefficiencies. Given the positive real return on bonds amidst the uncertainty elsewhere, we continue to recommend an overweight to bonds in our portfolios.
