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August 2021 Fixed Income Market Update

It's remarkable that after the first quarter, the worst for the Treasury index since 1980, broad bond benchmarks could deliver positive returns for the year.
August 2021

News & nuggets

Virus and vaccine

The spread of the more contagious Delta variant has led to renewed concerns around COVID some jurisdictions have responded by re imposing mask mandates and other restrictions.

58% of the U.S. population has received at least one dose of the vaccine, with 50% being fully vaccinated; this represents an increase of 4% for each group since the end of June.


The June non-farm payrolls report showed the addition of 850,000 new jobs, beating the consensus estimate of 706,000. Despite the strong jobs report and the labor force participation rate being unchanged at 61.6%, the unemployment rate increased 0.1% to 5.9%. The underemployment rate declined 0.4% to 9.8%, the first time below 10% since March 2020.


As of the end of June, FactSet had projected second quarter earnings to grow 63.1% for the trailing twelve months. With 59% of companies having reported, second quarter earnings are on pace for an 85.1% earnings growth rate. Revenue growth is tracking at 23.1% for the second quarter versus the 19.4% projection at the end of June. For the full year 2021, corporate earnings are projected to grow 40.7% with revenue growth of 13.9%.

Fiscal policy

Over the final weekend of the month, a bipartisan group of Senators indicated they had finalized language for the long discussed infrastructure bill. In addition to the infrastructure plan, Democrats hope to pass additional spending via the reconciliation process, though additional negotiations within their caucus appear necessary.

The two year period without a debt ceiling ended on July 31 at which point the debt ceiling was set at the current level of debt. Though the Treasury has approximately $450 billion on hand, the government is likely to need additional borrowings later in the year, which could create turbulence if not resolved.

Monetary policy

In Mid-July, Chairman Powell testified to congress and acknowledged that inflation has been “higher than expected and hoped for,” but still viewed inflation as transitory, characterizing recent pricing pressures as a “shock going through the system associated with the reopening of the economy.”

At the July 27-28 Federal Open Market Committee, the Fed made no policy changes, but continued to shift their tone marginally more hawkish after a similar approach at the June meeting and Powell’s congressional testimony. The committee noted that the economy “has made progress” toward their goals and Chairman Powell confirmed that this was the first meeting with significant debate around tapering of asset purchases. The Fed also announced two standing repo facilities to address money market pressures.

Outlook and conclusions

In our view, it is remarkable that after the first quarter, which was the worst for the Treasury index since 1980, it is now conceivable that broad bond benchmarks could deliver positive returns for the year. The sharp reversal in rates has played a key role, but if rates and spreads were to remain unchanged from here, income would carry the market to a positive return. The second quarter decline in Treasury yields that continued into July is noteworthy given the contrast versus the strong recovery that continues to unfold. Admittedly, growth underwhelmed very high expectations, but in conjunction with improving corporate profits and employment, the economic picture remains robust. The diverging paths of inflation and rates is striking, particularly as the difference has grown larger by the month. Inflation is not the sole driver of rates though and concerns around the delta variant could negatively impact economic forecasts and weigh on Treasury yields. Similarly, though the Fed continues to lean ever so slightly more hawkish each meeting, the central bank remains quite accommodative, which continues to support markets broadly. We have noted the challenges presented by valuations in non-governmental sectors; mild spread widening in July was favorable in this regard, though these sectors are still not cheap. Opportunity, particularly at the idiosyncratic level, persists despite the challenges and the continued value of income should not be overlooked.


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This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested Investments cannot be made in an index. Past performance is not necessarily a guide to future performance.

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The option adjusted spread (OAS) is the measurement of the spread of a fixed income security rate and the risk free rate of return, which is adjusted to take into account an embedded option. Basis points represent 1/100th of a percent (for example 50 bps equals 0.50%).

The Bloomberg Barclays US Aggregate Bond Index is a broad based flagship benchmark that measures the investment grade, US dollar denominated, fixed rate taxable bond market. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index tracks fixed rate agency mortgage backed pass through securities guaranteed by Ginnie Mae (GNMA) Fannie Mae (FNMA) and Freddie Mac (FHLMC)/  Bloomberg Barclays U.S Credit Index measures the investment grade, US dollar denominated, fixed rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non corporate component that includes foreign agencies, sovereigns, supra nationals and local authorities.

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