Investors were given more reasons to be optimistic about the economic outlook during the first quarter, and that optimism was clearly reflected in bond markets. The COVID-19 vaccination program ramped up in earnest, President Joe Biden signed a $1.9 trillion economic relief package and Federal Reserve officials made clear in several speeches and testimonies that policy rates were unlikely to change through 2023. The shift in economic outlook drove long-end U.S. Treasury rates sharply higher.
Higher government bond yields resulted in a negative return for the Capital Group Long Duration Credit Composite, which lagged the negative return of the benchmark Bloomberg Barclays U.S. Long Credit Index. Relative results reflected the portfolio’s underweight exposure to credit risk in a period when long duration spreads tightened by 15 basis points. Issuer selection was the most significant drag on relative returns, primarily due to the portfolio being underweight or not owning key credits in the banking and consumer noncyclical sectors.
The portfolio managers still view the U.S. investment-grade corporate market as being richly valued relative to fundamentals and leverage levels. Thus, they are remaining both conservative and selective in their approach.
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