In the second quarter of 2024, fixed income markets experienced mixed performance as investors navigated a complex economic landscape. Bond yields remained relatively stable with the 10-year U.S. Treasury yield ending the quarter only 14 bps higher at 4.34%. On the heels of softer economic data, the 10-year dropped to 3.80% as of August 5th, decreasing the spread between the 10-year and 2-year from 0.29% at the beginning of the 2nd quarter to 0.13%.
The Fed held rates steady in the second quarter, but reaffirmed the fluid and data dependent nature of future positions. There is currently an 86% probability that the Fed will cut rates by 50 bps at the September meeting on the backdrop of decreasing inflation, weak manufacturing data, and unemployment ticking up. Additional cuts are expected in November and December and throughout 2025. As you can see in the chart below, the entire yield curve has shifted lower in the last month. The longer-dated maturities are closer to their historical averages and will likely stay rangebound. As the Fed begins their rate cutting path and the shorter bond yields decline, we should finally see some normalization moving forward with longer maturities yielding more than shorter maturities.
The Fed held rates steady in the second quarter, but reaffirmed the fluid and data dependent nature of future positions. There is currently an 86% probability that the Fed will cut rates by 50 bps at the September meeting on the backdrop of decreasing inflation, weak manufacturing data, and unemployment ticking up. Additional cuts are expected in November and December and throughout 2025. As you can see in the chart below, the entire yield curve has shifted lower in the last month. The longer-dated maturities are closer to their historical averages and will likely stay rangebound. As the Fed begins their rate cutting path and the shorter bond yields decline, we should finally see some normalization moving forward with longer maturities yielding more than shorter maturities.
We are cautiously optimistic on emerging market bonds and continue to believe active management can outperform in this inefficient asset class. High-yield bonds saw positive performance returning 1.09% in the 2nd quarter. Investment-grade corporate bonds outperformed government securities during this period, benefiting from tightening credit spreads and strong investor demand. Along with all of the other pivots that we’ve discussed above, credit spreads have begun to widen in the beginning of the 3rd quarter. With consumer demand weakening and defaults increasing, we remain focused on high quality fixed income assets.
Overall, while fixed income markets didn't see dramatic moves in the second quarter, they provided steady income and some capital appreciation opportunities. We continue to overweight to fixed income taking advantage of the increased yields and providing negative correlation to equity risk.
Overall, while fixed income markets didn't see dramatic moves in the second quarter, they provided steady income and some capital appreciation opportunities. We continue to overweight to fixed income taking advantage of the increased yields and providing negative correlation to equity risk.