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WEEKLY FIXED INCOME UPDATE

For the week of May 26, 2020

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CHART OF THE WEEK: ELEVATED FINANCIAL STRESS RETURNS BACK TO NORMAL

The U.S. Federal Reserve’s (Fed) fiscal actions have been overwhelmingly and almost immediately effective in reducing the financial stress associated with the decline in economic activity caused by the measures to contain the spread of the COVID-19 virus. The St. Louis Fed releases a measure of the underlying factors causing co-movement in measures of financial stress such as spreads, rate movements, and equity market price changes. This Financial Stress Index, shown in the Chart of the Week, started rising in the last week of February, very rapidly peaked during the week of March 20th, and has now come down to near average levels.

WEEK IN REVIEW

Equity markets rallied last week, buoyed higher by optimism of the economy re-opening and hopes for positive news on vaccine trials. The rally was led by small cap and value stocks, which had been lagging larger cap and growth stocks by a wide margin. While the S&P 500 Index was up 3.3% on the week, the Russell 2000 Index rallied 7.9% and the Russell 2000 Value Index jumped 9.1%.

High yield also continued its run with spreads coming in below 700 basis points (bps), 77 bps tighter on the week, and more than 400 tighter from their recent peaks in late March. After suffering sharp declines during the sell-off, high yield energy was the strongest sector last week and for the month of May. The asset class continues to be supported by strong demand with high yield mutual funds recording $4 billion of inflows this week on the back of $29 billion of inflows over the previous 8 weeks.

Investment grade spreads have also rallied, yet are still double where they were pre-crisis, at just under 200 bps. With the Fed liquidity backstop, a healthy new issuance market, and likely the worst economic figures behind us, credit spreads in the investment grade market look attractive relative to insignificant premiums for increasing rate risk in long-dated Treasuries.

THE WEEK AHEAD

Tuesday
Consumer Confidence, New Home Sales

Thursday
Durable Goods Orders, GDP, Jobless Claims

Friday
International Trade in Goods, Personal Income and Outlays, Jerome Powell Speaks





   

Index Returns

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1 Week YTD 1-YR 3-YR 5-YR
U.S. Aggregate 0.35 5.23 10.49 5.10 4.03
IG Corporates 1.45 2.22 10.03 5.48 4.81
HY Corporates 2.71 -7.44 -2.28 2.11 3.71
Bank Loans 1.21 -7.61 -5.22 1.12 2.25
IG Corporates 1-3 Year 0.42 1.47 4.54 3.07 2.56
Global Aggregate 0.54 1.27 5.92 3.30 3.07





   
   
      
      

TREASURY RATES

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
2 Year 0.17 0.13 2.22 2 -140 -205
5 Year 0.33 0.29 2.17 3 -136 -184
10 Year 0.66 0.57 2.38 2 -126 -172
30 Year 1.37 1.12 2.80 4 -102 -143





   
   
      
      

CREDIT SPREADS

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
IG Corporates 186 93 373 -22 93 67
HY Corporates 680 315 1100 -77 344 292
EM Aggregate 457 278 720 -37 156 162
CMBS 161 60 260 -3 89 96
MBS 73 28 115 3 34 30
ABS 124 27 325 -8 80 93





   
      
      

OTHER INDICATORS

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Latest 1-WK Change YTD Change 1-YR Change
S&P GSCI 297.92 12.77 -138.30 -138.15
Crude Oil - WTI ($) 33.55 4.12 -27.51 -27.67
Trade Weighted Dollar* 128.01 0.00 -0.60 -0.25
5-Yr Breakeven Inflation Rate (%) 0.80 0.05 -0.89 -0.88

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