Summer should be a time for rest and relaxation, and perhaps a little quiet reflection. Not so with the markets this season. There were plenty of things to debate and concerns to keep investors’ anxiety levels up.
Fixed income markets managed through some risk-off growth fears, inflation worries, oil price increases, fiscal policy dilemmas, and the Federal Reserve finally turning a bit hawkish. The 10-year Treasury note closed the quarter at a 1.48% yield, nearly where it started, after a rally mid-summer took yields below 1.20%. The yield curve maintained its flattening trend, with the five to 30-year spread compressing by 12 basis points (bps) to +108. Likewise, credit markets moved through risk-off and risk-on periods. Short investment grade corporate bonds produced very modest excess returns while longer paper could not keep pace with Treasuries. High yield was the standout performer as investors continued to stretch for yield opportunities. Returns from securitized and municipal sectors were generally in line with Treasuries.