In the second quarter the market was chiefly concerned with geopolitical hot-spots (Iran, Syria, the Korean Peninsula, and Turkey), brewing trade wars (China, Europe, Canada, and Mexico), White House legal issues, OPEC Production, and the FED’s view on economic data. Higher oil prices (Brent +13%, WTI +15%) and U.S. dollar strength (+4.8% DXY) generated volatility in emerging markets. Solid economic growth, along with buoyant investor and consumer sentiment, prompted “risk-on” trading in a higher U.S. Treasury rate environment, propelling equities and high yield higher before escalating trade tensions pared some gains.
Chair Powell’s FOMC is overseeing an economy that has seen 2.0% growth in Personal Consumption Expenditures, the highest in six years; a 2.1% rise in the Consumer Price Index; and a precipitous drop to 3.754% in the unemployment rate, the lowest level for that indicator since 1969. The FOMC raised rates by a quarter point in June, the sixth such increase in 18 months, bringing the target rate to a range of 1.75% to 2.00%, while an ever-flattening yield curve and increasing trade tensions present a potential headwind to global growth and inflation.
Headlines sparked volatility in the U.S. Treasury yield curve as a generally higher and flatter trend was interrupted by spikes of steepening corresponding to brief periods of equity market weakness. For the quarter, the 2 to 10 year curve flattened by 14 basis points to 33, with a high in the quarter of 54. The 5 to 30 year curve flattened a similar 16 basis points to 25, with an inter quarter high of 43.
Excepting investment grade (IG) corporate credit all fixed income asset class returns were positive in the 2nd quarter, as measured by the Bloomberg Barclays family of indices. High yield (HY) corporates led with 1.03% of total return, outperforming U.S. Treasury inflation protected securities (TIPS) by 22 basis points, securitized credit by 80, nominal U.S. Treasurys by 93, and IG by 201.
Returns within the intermediate maturity sphere were in the same vein as their broad maturity brethren. The Bloomberg Barclays Intermediate High Yield index (BBIHY) was the top performer, returning 1.10% and outperforming 1 to 10 year TIPS by 49 basis points, intermediate U.S. Treasurys by 104, and the Bloomberg Barclays Intermediate Corporate index (BBIC) by 120.