February 2024 | BondBloxx Fixed Income Market Commentary

Overview

• Fixed income assets with higher yields staged a rally in February, as economic data reaffirmed the resilience of the U.S. economy, and earnings news confirmed the health of U.S. corporations. Equities rallied to record highs, helping boost the performance of risk-based assets. CCC-rated corporate debt was the top performing bond asset class (+2.1%), while long-duration treasuries declined the most (-2.3%).
• Most U.S. economic data surprised to the upside during February, including January payrolls (+353k), the unemployment rate (3.7%), January Consumer Price Index (+3.1%), and the Core Personal Consumption Expenditures deflator (+2.8%). This has led to strength in credit sectors such as U.S. high yield, while resulting in further volatility in long duration assets.
• Rate decreases are likely off the table for March and May, with market expectations for 2024 now at four rate cuts, approaching the Federal Reserve’s (“Fed”) guidance from December. Economists are discussing whether the Fed will need to recalibrate their stance on a 2.0% inflation goal, or even whether a rate hike might be required. Any change in “Fed-speak” at the next meeting will be closely watched.

Insights

• Given the strength of the U.S. corporations, we believe investors may benefit from increasing their allocation to credit, particularly BBB, single-B or CCC-rated U.S. corporates.
• We believe intermediate-duration exposure provides attractive potential returns in U.S. Treasuries and emerging markets.

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Chart 1: U.S. Fixed Income - February Total Return %

Chart 2: U.S. Fixed Income - 12 Month Total Return %

Table 1

Sources for Charts 1 & 2, Table 1, and overview data: ICE Data Services, JP Morgan, Bloomberg | Data as of 2/29/2024

U.S. Treasuries

Overview

• U.S. Treasury yields rose across the curve in the face of strong economic data. The benchmark 2-year U.S. Treasury ended the month at 4.62% (41 basis points higher), while the benchmark 10-year rose 34 basis points to end the month at a yield of 4.25%.
• Investors were faced with a collection of data in February that confirmed a resilient U.S. economy and labor market, pricing indicators coming in at or above expectations, and ongoing signs of weakness in Europe and China. This helped to boost valuations of U.S. high yield and emerging market debt while increasing yields on U.S. Treasuries.
• The persistence of recent U.S. inflation data (Consumer Price Index, Producer Price Index, and the Personal Consumption Expenditure Deflator) has sharply curtailed market expectations of Fed rate cuts at their May and June meetings. It has also decreased the full-year expectations of the number of rate cuts from 6 to around 4, based on Federal Funds Futures.

Insights

We prefer an overweight in intermediate-term U.S. Treasuries, to capture attractive yields, price returns from likely Fed actions in mid-2024, and a gradual normalization of the yield curve. This sector is less sensitive to the high volatility of long-term rates as well as the reinvestment risk of ultra-short maturities.

Chart 3: U.S. Treasury Target Duration - February Total Return %

Chart 4: U.S. Treasury Benchmark Maturity Curve (yield)

Table 2

Sources for Charts 3 & 4, Table 2, and overview data: ICE Data Services, Bloomberg | Data as of 2/29/2024

U.S. Investment Grade Corporates

Overview

• Driven by rising U.S. Treasury yields on the heels of U.S. price data, total return performance was negative in February for the U.S. Corporate Index (-1.5%).  With the help of lower duration and tighter yield spreads, the short duration 1-5 year maturity BBB index outperformed most of fixed income (-0.5%).
• BBB Investment grade credit spreads tightened in February for the short (1-5 year) and intermediate (5-10 year) sectors, leading to outperformance versus the broader indices. The all-in yields for BBB investment grade corporates climbed in February as U.S. Treasuries yields rose, with the BBB U.S. Corporate Index yielding 5.63% at month-end, +30 bps for the month.
• The capital markets continue to remain strong and receptive to new issuance, with nearly $200 billion in new investment grade corporate bonds being issued per month so far this year.

Insights

• We like BBB corporates for the higher income and total return potential they offer versus the broad U.S. Corporate Index and the other components of the U.S. Aggregate Index.
• Within the BBB rating category, we are especially constructive on the 1-5 year and 5-10 year maturity ranges, which we believe can help investors capture attractive yield and total return potential with less volatility than other investment grade alternatives.

Chart 5: U.S. Investment Grade - February Total Return %

Chart 6: U.S. Investment Grade - 12 Month Total Return %

Table 3

Sources for Charts 5 & 6, Table 3, and overview data: ICE Data Services, Bloomberg | Data as of 2/29/2024

U.S. High Yield Credit Ratings

Overview

• The performance of the U.S. high yield market was positive for the month of February, with significant outperformance experienced by CCC’s (+2.1%), while the BB rating category experienced a slightly negative return (-0.2%). 
• The CCC-rated category continues to significantly outperform the result of U.S. high yield over the past 3-, 6-, and 12-month time periods, including a return of nearly +15% for the last 12 months as compared to +3.3% for the U.S. Aggregate over the same time period, and +6.6% for broad investment grade corporates.
• Credit spreads tightened in February, with single-B’s tightening the most (-39 bps) among the three credit rating categories and BB’s tightening the least (-18 bps).
• U.S. high yield new issue volume was robust in February for the second month in a row, totaling $27.7 billion for the month. Refinancing was once again the overwhelming use of proceeds (J.P. Morgan).

Insights

We suggest that investors consider increasing their allocations to single-B and CCC-rated exposures, to capture their higher income and total return potential in the context of a resilient economic environment, while benefiting from the cushion that higher coupon income provides from possible spread volatility.

Chart 7: U.S. High Yield Ratings - February Total Return %

Chart 8: U.S. High Yield Ratings - 12 Month Total Return %

Table 4

Sources for Charts 7 & 8, Table 4, and overview data: ICE Data Services, Bloomberg | Data as of 2/29/2024

U.S. High Yield Industry Sectors

Overview

• February total return performance was positive for six of the seven high yield industry sectors, led by the more defensive Energy industry (+0.5%).
• As the only laggard, the Telecom, Media & Technology (TMT) industry was down 0.2% for the month, as weakness continued to be experienced by its Cable/Satellite sub-sector.
• Credit spreads tightened across all industry sectors in February. The largest spread tightening occurred in the Core Industrial (-41 bps), Consumer Cyclical (-35 bps), and Energy (-30 bps) industries, respectively.
• While defaults and distressed exchanges rose in February, with 12 companies defaulting or completing distressed transactions, the 12-month default rate declined (to 2.5%), remaining well below the long-term average. Average recovery rates for defaulted or distressed bond improved but remain below long-term averages (J.P. Morgan).

Insights

Within U.S. high yield industry sectors, we remain constructive on high yield industries that demonstrate strong fundamentals and resilience in the current economic climate, including Core Industrial, Consumer Cyclical, and Energy.

Chart 9: U.S. High Yield Sectors - February Total Return %

Chart 10: U.S. High Yield Sectors - 12 Month Total Returns %

Table 5

Sources for Charts 9 & 10, Table 5, and overview data: ICE Data Services | Data as of 2/29/2024

Emerging Market Debt

Overview

• Second only to CCC High Yield Debt in Fixed Income, emerging markets (“EM”) debt reported strong returns in February, especially categories excluding long-dated maturities, as attractive valuations and a ‘risk-on” market drove yield spreads tighter.
• The less-volatile, lower-duration benchmark of EM debt with maturities less than 10 years returned +1.3% in February, outperforming the longer-duration EM benchmarks, while broad U.S. Aggregate and Treasury benchmarks were in negative territory due to the impact of rising interest rates.
• While spreads were sharply tighter across the EM debt asset class in February, high yield rated EM debt outperformed investment grade EM debt, as investors sought out yield, and lower duration assets rallied.

Insights

We recommend investing in emerging markets sovereign debt with 1-10 year maturities, as this short-to-intermediate term duration serves to reduce volatility and interest rate sensitivity, while benefiting from attractive yields and total return potential.

Chart 11: USD Emerging Market Debt - February Total Return %

Chart 12: USD Emerging Market Debt - 12 Month Total Return %

Table 6

Sources for Charts 11 & 12, Table 6, and overview data: J.P. Morgan| Data as of 2/29/2024

Glossary & Index Definitions

• Basis Point (bps): A standardized measure to denote a percentage change in interest rates, spreads, or other financial metrics. 1 basis point is equivalent to one-hundredth of a percentage point (0.01%).
• The Bloomberg A Corporate Index measures the A-rated, fixed-rate, taxable corporate bond market.
• The Bloomberg BBB Corporate Index measures the BBB-rated, fixed-rate, taxable corporate bond market.
• The Bloomberg BBB 1-5 year, 5-10 year and Long Corporate indices measure BBB-rated, fixed-rate, taxable corporate bonds of maturities between 1-5 years, 5-10 years, and 10+ years respectively. The indices include USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
• The Bloomberg Financials Corporate Index measures the investment grade, fixed-rate, taxable corporate bond market from issuers in the industrial sector, including the banking, financial services, and insurance subsectors.
• The Bloomberg Global Inflation-Linked Total Return Index measures the performance of investment-grade, government inflation-linked debt from 12 different developed market countries.
• The Bloomberg Industrials Corporate Index measures the investment grade, fixed-rate, taxable corporate bond market from issuers in the industrial sector.
• The Bloomberg Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prefunded bonds.
• The Bloomberg U.S. Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US-dollar-denominated, fixed-rate taxable bond market.
• The Bloomberg U.S. Mortgage-Backed Securities Index tracks fixed-rate agency mortgage-backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
• The Bloomberg U.S. Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.
• The Bloomberg U.S. Treasury Target Duration Indices are a suite of 8 indices designed to target a specific duration using US Treasury securities. The 8 durations targeted are 6 Month, 1 Year, 2 Year, 3 Year, 5 Year, 7 Year, 10 Year and 20 Year.
• The Bloomberg Utilities Corporate Index measures the investment grade, fixed-rate, taxable corporate bond market from issuers in the utilities sector.
• The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.
• Credit Spread: the difference in yield between a debt security and its benchmark measured in basis points.
• The ICE BofA Broad Market Index measures the performance of U.S. dollar-denominated, investment grade debt securities, including U.S. Treasury notes and bonds, quasi-government securities, corporate securities, residential and commercial mortgage-backed securities and asset-backed securities.
• The ICE BofA Current 10-year U.S. Treasury Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury note.
• The ICE BofA U.S. Corporate Index tracks the performance of U.S. dollar-denominated investment grade rated corporate debt publicly issued in the U.S. domestic market.
• The ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar-denominated, below investment grade-rated corporate debt publicly issued in the U.S. domestic market.
• The ICE BofA U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government in its domestic market.
• The ICE Diversified U.S. Cash Pay High Yield Rating Category Indices contain all securities in the ICE BofA U.S. Cash Pay High Yield Index, broken down by their rating categories: BB1-BB3, B1-B3, and CCC1-CCC3. Index constituents are capitalization-weighted, based on their current amount outstanding.
• The ICE Diversified U.S. Cash Pay High Yield Sector Category Indices contain all securities in the ICE BofA U.S. Cash Pay High Yield Index, broken down by industry including Industrials; Telecom, Media & Technology; Healthcare; Financial & REIT; Energy; Consumer Cyclicals; Consumer Non-Cyclicals.
• The J.P. Morgan 1-10 Year Emerging Markets Sovereign Index tracks liquid, U.S. dollar emerging market fixed, and floating-rate debt instruments issued by sovereign and quasi sovereign entities.
• The JP Morgan EMBI Global Diversified Index tracks total returns for traded external debt instruments in the emerging markets, including U.S. dollar-denominated Brady bonds, loans, and Eurobonds with an outstanding face value of at least $500 million.
• Option Adjusted Spread (OAS): For a bond, OAS is the measurement of the spread between the bond and the underlying government yield curve. For an Index, the average of its constituent security government option-adjusted spreads, weighted by full market value.
• Yield is the annual rate of return on a bond. It has a reverse relationship with price such that as bond prices rise, yields fall.

Disclosures

There are risks associated with investing, including possible loss of principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline. Investment grade bonds have ratings of BBB- or above. High yield bonds have ratings of BB+ and below. BBB-rated bonds are typically subject to greater risk of downgrade than other investment grade bonds, especially during an economic downturn or substantial period of rising interest rates. Any downgrade of such bonds would relegate such bonds from the investment grade universe to the high yield (or “junk” bond) universe, which could negatively affect their liquidity and their value. High yield bonds may be deemed speculative, may involve greater levels of risk than higher-rated securities of similar maturity and may be more likely to default. Investing in mortgage- and asset- backed securities involves interest rate, credit, valuation, extension and liquidity risks and the risk that payments on the underlying assets are delayed, prepaid, subordinated or defaulted on. 

BondBloxx Investment Management Corporation (“BondBloxx”) is a registered investment adviser. The content of this presentation is intended for informational purposes only and is not intended to be investment advice. 
Nothing contained in this presentation constitutes investment, legal, tax, accounting, regulatory, or other advice. Information contained in this presentation does not constitute an offer to sell or a solicitation of an offer to buy any shares of any BondBloxx ETFs. The investments and strategies discussed may not be suitable for all investors and are not obligations of BondBloxx. 

Decisions based on information contained in this presentation are the sole responsibility of the intended recipient. You should obtain relevant and specific professional advice before making any investment decision. This information is subject to change without notice. 

Bond ratings are grades given to bonds that indicate their credit quality as determined by private independent ratings services, such as Standard & Poor’s, Moody’s and Fitch. These firms evaluate a bond issuer’s financial strength or its ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from ‘AAA’, which are the highest grade, to ‘D’, which is the lowest grade.

Certain information contained herein has been obtained from third party sources and such information has not been independently verified by BondBloxx. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by BondBloxx or any other person. While such sources are believed to be reliable, BondBloxx does not assume any responsibility for the accuracy or completeness of such information. BondBloxx does not undertake any obligation to update the information contained herein as of any future date.

Index performance is not illustrative of fund performance. One cannot invest directly in an index. Please visit bondbloxxetf.com for fund performance. 

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