Despite periods of volatility, credit spreads and U.S. Treasury yields ended the quarter little changed. Mixed economic data, rising COVID-19 infections and Federal Reserve policy statements were all in focus for investors. The tragic increase of COVID-19 cases in the U.S. and elsewhere dampened consumer sentiment and appeared to have a negative impact on investors’ appetite for risk. Fed Chairman Jerome Powell confirmed signals from earlier communications that the Fed was likely to begin tapering asset purchases by the end of the year, and the Fed signaled via the dot plot that interest rate hikes are likely to begin in 2022.
U.S. long investment-grade bonds
Treasury yields rose and long bond spreads widened slightly
Against this backdrop, the Capital Group Long Duration Credit Composite outpaced the benchmark Bloomberg U.S. Long Credit Index on a gross of fees basis but lagged net of highest management fees. For the representative portfolio, positive contributions from security selection and sector allocation outweighed the negative impact of curve and duration positioning.
Despite the unusual nature of the COVID-19 shock and the policy response, the tension in markets is being driven by the usual forces of valuations, economic fundamentals and the path of monetary policy. For investment-grade credit, spreads are near historically low levels while the duration of the index is close to all-time highs and investment-grade corporate leverage is elevated. However, we are likely nearing the end of unrestrained policy accommodation, and economic growth is likely to be trending lower in the next two years. The portfolio managers have focused on owning a mix of credits where the fundamentals continue to support further spread tightening while also looking to transition into more highly rated credits where there is little cost to making the shift.
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