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May 2023

Bonds Record Another Strong Quarter

Charles Luke
Charles Luke Chief Investment Officer

Key Points

  • Despite potential headwinds from deposit withdrawals at many regional banks, Investment Grade bonds achieved positive performance in March
  • The MOVE index, a well-recognized benchmark for US Treasury market volatility, surged over the quarter
  • We are cautious on leveraged loans given the nature of their use for private equity transactions and floating rate characteristics

Taxable fixed income markets recorded a second straight quarter of positive performance, driven by a fall in Treasury rates, after the 10-year US Treasury bond set a high of 4.33%1 on October 21, 2022. Additional Federal Reserve rate increases and higher long-term interest rates drove the reversal in performance, as well as a healthy credit environment in which default rates remained historically low.

Over the quarter, the broad US Investment Grade market returned 2.96%, and US corporate bonds returned 3.50%2. Despite potential headwinds from deposit withdrawals at many regional banks, Investment Grade bonds also achieved positive performance in March, as the broad index climbed 2.54%3. Notably, financial sector performance was also positive throughout the turmoil, rising 1.42%4.

While the moves were positive, the market continued to experience high levels of volatility. The MOVE index, a well-recognized benchmark for US Treasury market volatility, surged over the quarter, exceeding its 2020 COVID high while falling just short of the maximum point reached in 20085. While high, volatility measures the absolute movement in rates, not the direction. As a result of the decline in yields to start the year and the flight to quality during March6, the bond market has largely benefitted from rate volatility — a stark contrast from 2022.

 

High yield markets have also achieved positive performance in 2023. US high yield bonds, leveraged loans and emerging market high yield bonds were up 3.57%, 3.25% and 1.58%, respectively7. We continue to expect yields above 8%8 to drive positive total returns. We also believe default rates will approach long-term averages but not move meaningfully above levels typical of a normal credit cycle. 

Ultimately, this should be around 5-6%9. However, we are cautious on leveraged loans given the nature of their use for private equity transactions and floating rate characteristics. High yield bonds have a major advantage over loans, given average fixed coupons of just 5.9% with an average maturity of 5.3 years10. This is in stark contrast to loans with average yields of 9.4%11, which is likely to put cash flow pressure on leveraged businesses.

Looking forward, the strong performance over Q1 2023, supportive credit environment and stable economic fundamentals point toward positive total returns, especially after the adjustment in yields last year.

 

 

1US 10-Year Treasury Yield, Bloomberg: GT10 Govt

2 Broad US Investment Grade Market: Bloomberg US Aggregate Bond Index, Bloomberg: LBUSTRUU Index; US Corporate Bonds: Bloomberg US Corporate Bond Index, Bloomberg: LUACTRUU Index

3 Investment Grade Bonds: Bloomberg US Aggregate Bond Index, Bloomberg: LBUSTRUU Index

4 Financial Sector: Bloomberg US Financial Institutions Capped Index, Bloomberg: I27906 Index

5 Ice BofA MOVE Index, Bloomberg: MOVE Index

6 US 10-Year Treasury Yields dropped peak-to-trough by 73 bps in March, Bloomberg: GT10 Govt

7 US High Yield Bonds: Bloomberg US High Yield Index, Bloomberg: LF98TRUU Index

Leveraged Loans: Morningstar LSTA Leveraged Loan Index, Bloomberg: SPBDAL Index

Emerging Market High Yield Bonds: Ice BofA High Yield USD Emerging Markets Liquid Corporate Plus Index, Bloomberg: EMHY Index

8 US High Yield Corporate bonds have an average yield above 8% as of 3/31, Bloomberg: LF98YW Index

9 Moody’s Bond Only Moderate Pessimistic Forecast for Default Rates, Moody’s February 2023 default report 

10 Bloomberg, LF98TRUU Index (Field: CPN and Field: WEIGHTED_AVERAGE_MATURITY_YEARS)

11 Morningstar LSTA Leveraged Loan 100 Weighted Average Yield, SPBDLLY Index as of March 31, 2023.

Past performance or performance based upon assumptions is no guarantee of future results.

Index performance is provided as a benchmark. It is not illustrative of any particular investment. Indices are unman-aged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.

 

Important Disclosures

 

Important Information


Figures shown are past results and are not an indication of future results.

The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

 

This document may contain forward-looking statements relating to the objectives, opportunities and future performance of the US market generally. Forward-looking statements may be identified by the use of such words as: “expect,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. These statements are based primarily upon a hypothetical set of assumptions applied to certain historical financial information that has been provided by third-party sources and, although believed to be reliable, the information has not been independently verified and its accuracy or completeness cannot be guaranteed. The opinions, projections, forecasts and forward-looking statements expressed are also valid as of the date of this document and are subject to change based on market and other conditions. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of City National Rochdale nor any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.

 

This information is not intended as a recommendation to invest in a particular asset class, strategy or product. 

 

The information presented is for illustrative purposes only and based on various assumptions which may not be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used have been stated or fully considered. 

 

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification may not protect against market risk or loss. Past performance is no guarantee of future performance. 

 

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

 

CNR is free from any political affiliation and does not support any political party or group over another.


This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a SEC-registered investment adviser and a wholly-owned subsidiary of City National Bank. City National Bank provides investment management services through its sub-advisory relationship with City National Rochdale.

 

Index Defintions


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. 

 

Bloomberg Barclays US Aggregate Bond Index (LBUSTRUU): The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

 

GT2 Govt, GT3 Govt, GT5 Govt, GT10 Govt, GT30 Govt: US Government Treasury Yields

 

DXY Index: The US dollar index (USDX) is a measure of the value of the US dollar relative to the value of a basket of currencies of the majori-ty of the US’s most significant trading partners. 

 

Bloomberg US Investment Grade Corporate Bond 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.

 

Bloomberg US Corporate High Yield Index:The Bloomberg US Corporate High Yield Index measures the performance of non-investment grade, US dollar-denominated, fixed-rate, taxable corporate bonds.

 

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.

 

S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads and interest payments. The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the US market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria. Its ticker on Bloomberg is SPBDLLB.

 

IA SBBI US LT Government: The index measures the performance of US dollar-denominated bonds issued in the US investment-grade bond market including US and non-US corporate securities that have at least ten years to maturity and a credit rating of AAA/AA.

 

IA SBBI US LT Corporate: IA SBBI US Long Term Corporate Bond Index: The index measures the performance of US dollar denominated bonds issued in the US investment grade bond market including US and non US corporate securities that have at least ten years to maturity and a credit rating of AAA/AA.

 

ICE Bank of America MOVE Index: The MOVE index, or Merrill Lynch Option Volatility Estimate Index, is a gauge of interest rate volatility in the U.S. Treasury market. It is calculated from options prices, which reflect the collective expectations of market participants about future volatility. The index measures the implied volatility of U.S. Treasury options across various maturities.

 

Bloomberg US Corporate Bond Index: The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

 

Bloomberg US Financial Institutions Capped Index: The index measures the performance of U.S. dollar-denominated publicly-issued investment-grade corporate bonds in the financial sector. The index is market-capitalization weighted with a 5% cap on any one issuer and a pro rata distribution of any excess weight across the remaining issuers in the Underlying Index.

 

Bloomberg US High Yield Index: The Bloomberg US Corporate High Yield Index measures the performance of non-investment grade, US dollar-denominated, fixed-rate, taxable corporate bonds.

 

Ice BofA High Yield USD Emerging Markets Liquid Corporate Plus Index: the ICE BofA High Yield US Emerging Markets Liquid Corporate Plus Index is a subset of the ICE BofA Emerging Markets Liquid Corporate Plus Index, which includes only securities rated BB1 or lower.

 

Bloomberg: LF98YW Index: The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded. 

 

“YW” is the ticker to pull the yield-to-worst on the index.

 

Bloomberg: LF98TRUU Index: The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded. This is the total return index level.

 

Morningstar SPBDLLY Index: Yield to maturity time series of the Morningstar LSTA US Leveraged Loan 100 Index. The Morningstar LSTA US Leveraged Loan Index is a market-value weighted index designed to measure the performance of the US leveraged loan market.

 

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.

 

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).

 

Quality Ranking: City National Rochdale Proprietary Quality Ranking is the weighted average sum of securities held in the strategy versus the S&P 500 at the sector level using the below formula.

 

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.

 

Non-deposit investment Products are: • not FDIC insured • not Bank guaranteed • may lose value

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