What a difference a new year makes! Having been lulled into complacency with respect to volatility, financial markets – particularly the domestic equity markets – got a rude awakening in early February. Suddenly, the “short vol” trade came to a screeching halt, and equities entered a period of heightened volatility with a distinctly downward trend. Exacerbated by political developments (principally, fears of a trade war), revaluation of tech stocks, and the challenge of rising interest rates, equities finished the period in a downward swoon.
The bond market’s reaction was a bit confused, or more charitably, mixed. Ultimately, a flight to quality or “risk-off” mentality ensued and Treasury bonds rallied at quarter-end. Over the period, however, long-term bond yields rose, with the 10-year closing the quarter at a 2.74%, and the 30-year closing at a 2.97% yield, 33 and 23 basis points (bps) higher, respectively. Corporate bond spreads widened, with investment grade spreads moving 16 bps on average and high yield moving slightly less. Other spread sectors felt some pain as well. The yield curve flattened, driven by the path of short-term rate hikes the Federal Reserve has put in place. The 2- to 10-year and 2- to 30-year yield spreads are now at multi-year lows.