Fixed Income Commentary: As at March 31, 2024*

The first quarter of 2024 was an exceptionally strong period for most asset classes, as the U.S. Federal Reserve’s (“Fed”) dovish pivot in December encouraged investors to embrace more risk. Equities reached new all-time highs, while credit spreads tightened back toward the lower end of their long-term ranges. One asset that struggled during the quarter was the government bond market, as yields moved sharply higher.

With a correction in overzealous rate cut expectations, government bonds gave back about half the Q4 2023 rally in the period. Given an inverted yield curve and lower break-evens, the long-end was particularly impacted. Meanwhile, credit absorbed the rate sell-off with spreads tightening across investment grade and high yield markets. Comforting financial conditions and stable credit markets facilitated a robust new issue market, demonstrating continued access to capital, albeit at higher borrowing costs.

Tight break-evens and uncertain economic conditions mean risk/reward remains challenged in longer duration government bonds. For credit, with all-in yields still at cycle highs and bond prices still at significant discounts to par, we see good outright return potential (with attractive capital gains). In addition, our team continues to focus on finding uncorrelated special situation investments that can provide attractive yield and capital gain potential. We are increasingly attentive to headline risk and potential divergence, layering in single name shorts. At the macro level, we took advantage of the rally in risk assets to rebalance hedges given macroeconomic uncertainty and expensive credit valuations.

(*) refers to average annualized performance.