3Q13 MARKET REVIEW: After the Federal Reserve 'balked' in its September 17th decision NOT to reduce quantitative easing (QE), the fixed income market enjoyed a reprieve from negative returns sparked by the 'Taper Tantrum' of May, June, and July. Armed with new evidence of stilltepid growth in both jobs and GDP, the Fed elected to maintain the current pace of its $85B per month U.S. Treasury and Agency MBS purchase program. The announcement ignited a strong bond market rally. The 10yr Treasury yield, having reached a year-to-date high of 3.00% on September 5, quickly declined and finished 3Q13 at 2.64%. Despite the late quarter rally, the 10yr yield remained 101 basis points (bps) above its 1.63% YTD low set on May 1, and 12 bps higher than the 2.52% of June 30. The 30yr Treasury also rose 19bps to close 3Q13 at 3.68%, resulting in a steeper yield curve. The other sectors of the U.S. fixed income market participated in the rally as well, with spreads narrowing across all sectors in the last two weeks of September.
The Barclays Aggregate Index rose by 0.57% in 3Q13, having stood at a loss of -0.36% the day before the FOMC's declaration to not slow QE. Despite the bounce, the Index remains in negative territory YTD and for the trailing 12-months at -1.77% and -1.68%, respectively. In stark contrast to 2Q13, Investment Grade (IG) corporate spreads tightened 10bps during 3Q13, producing a positive nominal return of 0.82% and an excess return of 0.92%. The respective YTD total returns in IG remain a disappointing -2.62%, but excess returns are still positive at 0.61% YTD. The 1-Yr results for IG Credit now fall to a nominal -1.58%, but 1.79% in excess of Treasuries. Continue Reading »