UE-EN Institutional

July 2021 Fixed Income Market Update

Even with spreads broadly tight, we continue to uncover relative value looking a layer deeper at the sector, quality and idiosyncratic security levels.
July 2021

News & nuggets

Economic growth and unemployment

The third estimate of first quarter U.S. GDP was released in June and showed the economy grew 6.4%, unchanged from the prior estimate. Consumer spending and business investment grew 11.4% and 11.7%, respectively; each were revised higher from the prior estimate, while imports were revised higher to 9.5% growth, which offset the gains.

The May jobs report showed the addition of 559,000 new jobs; this figure was below estimates, but a significant improvement from the disappointing April report. The unemployment rate declined to 5.8% from 6.1% and underemployment declined to 10.2% from 10.4%, but the labor force participation rate also declined 0.1% to 61.6%.


After a very strong first quarter earnings season, which saw corporate profits grow 52.5% year over year, second quarter earnings are expected to be even stronger. FactSet projects second quarter earnings to grow 62.8% for the trailing twelve months, an upward revision from the estimate of 52.1% on March 31. Revenue growth for the second quarter is projected at 19.5%. For the full year 2021, corporate earnings are projected to grow 35.2% with revenue growth of 12.3%.

Virus and vaccine

At the end of June, 54% of the U.S. population has received at least one dose, with 46% of the population fully vaccinated, up from 51% and 41%, respectively, at the end of May. Despite the mass vaccination, some concerns remain pertaining to rising regional case counts and increased reports of the Delta variant of the virus.

Fiscal policy

Democrats and Republicans appeared to have agreed upon a $1.2 trillion infrastructure package, though hurdles remain within each party for approval. The package is narrower than the initial Democratic proposal, but Democrats may elect to pursue some of the additional spending provisions, along with others in President Biden’s American Families Plan, via reconciliation.

Monetary policy

The June 15-16 Federal Open Market Committee was notable for its more hawkish tone. The Fed ‘dot plot’ showed members moving up their projections for the next rate hike to 2023 from 2024 in the prior dot plot. The June dot plot projects two rate hikes in 2023. Though it continued to refer to inflation as ‘transitory,’ the Fed increased its inflation projection for the year by a full 1% since March, up to 3.4%. As expected, the Fed did not change either the Fed Funds rate or announce a tapering of asset purchases. However, Chairman Powell acknowledged the beginning of discussions about tapering, referring to it as the ‘talking about talking about’ meeting. Minutes of the meeting are set to be released on July 7 and the next FOMC meeting is scheduled for July 27-28.

On June 2, the Fed announced it would unwind the corporate bond holdings it had built up as part of its unprecedented monetary policy response to the COVID crisis. The total holdings of approximately $14 billion were a small fraction of the full potential size of $750 billion; the holdings are set to be unwound by the end of the year.

Outlook and conclusions

At the end of March, when rates had nearly doubled in the first quarter, we argued that “many of the factors pushing rates higher have been pulled forward rather than playing out over the course of the year Further, a variety of factors are likely to support bonds in the near term.” Despite very strong economic growth data and inflation data exceeding even raised expectations, rates reversed directions in the second quarter, once again flummoxing those calling for higher rates. While the Fed’s June meeting was labelled as “hawkish,” we view a central bank that is projecting two rate hikes two years from now, particularly amidst the current economic growth, as still extraordinarily accommodative. Non-governmental sectors present a different set of challenges. Valuations are broadly tight, factoring in a high degree of positive news and further positive expectations. Our base case view is that these sectors continued to perform well given the strength of the economic and policy backdrop, but carry is likely to increase in importance as further spread compression becomes more difficult. Though a catalyst for widening is not readily apparent, prudence in positioning is warranted given the asymmetric risks from current spread levels. Even with spreads broadly tight, we continue to uncover relative value looking a layer deeper at the sector, quality and idiosyncratic security levels.


All investments involve risk, including the possible loss of principal.

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.

Taplin, Canida Habacht, LLC is a registered investment adviser and a wholly owned subsidiary of BMO Asset Management Corp which is a subsidiary of BMO Financial Corp. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO). 

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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.

Investment products are: Not A Deposit l Not FDIC Insured l No Bank Guarantee l May Lose Value

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