Quarterly Commentary


Fixed Income Commentary

Economically, things continued to improve in the US. Private payrolls averaged a gain of over 200,000 new jobs per month in the third quarter with the unemployment rate falling to 3.7% in September, the lowest level in more than thirty years. The gains in the stock and housing markets have fed into consumer confidence, as the conference board survey hit its highest level since late 2000. Fed policy continued to normalize in the third quarter with the Fed hiking overnight rates by 0.25% to 2.25%. Federal Reserve committee members have commented on the strength of the labor markets, the uptick in wage growth, and broad health of the American consumer and show few concerns regarding a potential trade war or inflation. Currently, the market is pricing in another Fed hike in December and an additional 1-2 in 2019. US interest rates responded to the Fed hikes, as the two-year US Treasury yield rose from 2.52% to 2.82% and the 10-year from 2.86% to 3.08%. The rise in interest rates has led to losses for bond investors. The Barclays Aggregate bond index returned -1.6% YTD through the third quarter. Losses for longer duration corporate bonds and US Treasuries exceeded that number. Spreads on corporate bonds, as measured by the ICE US Corporate Master index tightened from 129bps to 113bps at quarter end. Capital markets remain open, demand for debt is plentiful, and corporate repayment capacity is strong leading to lower corporate defaults and lower required spreads.