Insights
Taxable Strategies:
Changes on the Horizon?
- April may have been the near-term peak in Treasury yields.
- Extend portfolio maturities to capture income and increase forward-return potential.
- Credit fundamentals remain sound.
Macroeconomic and monetary policy sentiment shifted during the second quarter as leading indicators fell from February highs, and downward progress on inflation was evident, but slower than expected. This led the market to believe the higher-for-longer interest rate outlook gained a foothold. The change in market perception dampened expectations for Fed rate cuts to as few as 0-to-2 by year-end. The volatility that developed resulted in increased Treasury yields. For example, the 10-year U.S. Treasury bond increased about 60 bps to 4.7% by late April, but because of weaker-than-expected data (e.g., consumer spending and CPI), yields settled at 4.4% by quarter-end. As confidence emerges, a loosening of policy could be warranted (chart 1).
Chart 1: Q2 and YTD Returns
Source: Bloomberg, as of June 30, 2024.
Past performance is no guarantee of future results.Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.
City National Rochdale currently has a 10-year U.S. Treasury range of between 4.1% and 4.6%. Most taxable asset classes closed out 1H2024 in positive territory (chart 2).
Chart 2: 10-Year Treasury Yield
Source: Bloomberg, as of June 30, 2024.
Past performance is no guarantee of future results.Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.
Interestingly, longer maturity bonds are beginning to outperform shorter tenors, including T-Bills. As prevailing yields remain attractive across many segments of the taxable fixed income markets and confidence re-emerges on rate cuts this fall, we are positioned neutral to our various benchmarks. Should geo-political risk or fluctuating data impact the market, we maintain the flexibility to respond. Selectively adding duration by pushing further out on the curve into longer maturity strategies could add value to investor portfolios. Rotating from T-Bills, for example, which have elevated reinvestment risk, into medium-term bonds could lock in compelling yield for an extended period and potentially provide enhanced total return.
The technical and fundamental backdrop has led to U.S. investment grade (IG) and high yield corporate (HYC) quality spreads remaining near multi-decade lows. Continued, albeit moderating, economic growth has supported issuer credit profiles so far this year. For example, interest coverage ratios, which are a standard measurement of debt serviceability, are healthy, while default experience among HYC is running slightly below long-term averages. With gross issuance up roughly 25% YoY through Q2 and total fixed income bond flows positive, this supply and demand balance has helped support bond prices. Within the IG space, option-adjusted spread as a % of total yield is below historical averages and reflects net demand for bonds. We expect current conditions to persist in the short run, but an unexpected drag on the economy, coupled with volatility as the November elections near, could lead to spread widening. Thus, research due diligence is critical, but we would see market dislocation as a potential entry point for investors.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
Investing involves risk including loss of principal. The market price of a security may move up and down, sometimes rapidly and unpredictably. The securities of mid-cap companies may have greater price volatility and less liquidity than the securities of larger capitalized companies. Larger, more established companies may be unable to attain the high growth rates of successful, smaller companies during periods of economic expansion. Current and future holdings are subject to risk. There is no guarantee the fund will achieve its stated objective.
City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank is a subsidiary of the Royal Bank of Canada. City National Bank provides investment management services through its subadvisory relationship with City National Rochdale. Brokerage services are provided through City National Securities, Inc., a wholly-owned subsidiary of City National Bank and Member FINRA/SIPC.
Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
S&P 500 Growth: The S&P 500 Growth Index is a stock index administered by Standard & Poor’s-Dow Jones Indices. As its name suggests, the purpose of the index is to serve as a proxy for growth companies included in the S&P 500.
S&P 500 Value: The term S&P 500 Pure Value Index refers to a score-weighted index developed by Standard and Poor’s (S&P). The index uses what it calls a “style-attractiveness-weighting scheme” and only consists of stocks within the S&P 500 Index that exhibit strong value characteristics. The index was launched in 2005 and consists of 120 constituents, the majority of which are financial services companies.
S&P 500 Equal Weight: The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
DJDVP: The Dow Jones U.S. Select Dividend Index aims to represent the U.S.’s leading stocks by dividend yield.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange.
The Russell 2000 Index is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
The Bloomberg Magnificent 7 Total Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).
Definitions
Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations. MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).
*Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.
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