OBND returned 6.79% on a NAV basis. Our modest underweight to loans contributed to performance as the asset class underperformed the benchmark.
In the US, headline inflation has continued to fall from peak levels. We believe inflation will ease further, but progress is contingent on lower wage inflation and slower house price inflation. Still, the Federal Reserve (Fed) has pivoted, ending its cycle of tightening and signaling rate cuts in 2024. The markets are clearly discounting a goldilocks landing and anticipating a plethora of rate cuts from the Fed in 2024 that are likely to start in the second quarter. Additionally, risk asset performance (especially over the past two months) has been nothing short of extraordinary. Spreads in high yield have collapsed from about 440 basis points (bps) in October to below 315 bps at year end and most would be hard-pressed to claim it’s cheap. Ten-year rates have gone from 5% in mid-October to 3.86% at the end of the year, another remarkably outsized move. This environment lead to the fund’s total return performance surpassing 6.70% for the quarter.
Fund Performance
QTD |
YTD |
1 Year |
3 Year |
5 Year |
10 Year |
Since Inception Sept 27 2021 |
|
---|---|---|---|---|---|---|---|
NAV | 6.79% | 9.60% | 9.60% | - | - | - | -1.17% |
Market Value | 6.71% | 9.47% | 9.47% | - | - | - | -1.13% |
Bloomberg U.S. Aggregate Bond Index | 6.82% | 5.53% | 5.53% | -3.31% | 1.10% | 1.81% | -3.82% |
SPDR Loomis Sayles Opportunistic Bond Composite Index | 6.77% | 10.78% | 10.78% | 0.24% | 4.20% | 3.79% | -0.48% |
Source: State Street Global Advisors, as of December 31, 2023. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit www.ssga.com for the most recent month-end performance. The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus. Performance returns for periods of less than one year are not annualized. Performance is shown net of fees. The market price used to calculate the market value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. If you trade your shares at another time, your returns may differ. It is not possible to invest directly in an index. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. Index performance is not meant to represent that of any particular fund.
Gross Expense Ratio: 0.55% Net Expense Ratio: 0.55%
Fixed-income markets broadly produced strong results during the fourth quarter. Softening inflation figures eased concerns that sticker inflation would cause the Fed to adopt a “higher-for-longer” approach with respect to policy interest rates. In December, the Fed suggested that rate cuts could begin as early as the first half of 2024. Fixed-income markets rallied on these developments, helping them recover much of the ground lost earlier in 2023.
With inflation slowing broadly and supply chain issues having normalized, central banks appear to be at or nearing the end of interest rate hiking cycles. The Fed has indicated that it’s willing to pivot toward interest rate cuts by mid-2024. Due to these conditions, we believe a downturn is less likely and maintain that we are late cycle with a higher probability of a soft landing rate scenario.
Global Investment-Grade Credit: Complacency is high in credit, with the market betting big that the Fed has got its back. Will the fall in inflation be sufficient to allow the Fed to cut rates as anticipated? This will likely determine the fortunes of investment-grade credit for the foreseeable future. With the increased likelihood of a “soft landing,” there is an argument to prioritize higher risk credit at the expense of investment grade credit. But with the recent rally, valuations elsewhere are not particularly compelling. 2024 has started with an investment-grade issuance festival, and we are looking to reshape the portfolio (rather than change the overall allocation) to take advantage of select opportunities. If we gain more confidence in the soft landing scenario, we may increase exposure to subordinated financials as a means of increasing risk within the investment-grade portion of the portfolio — January inflation numbers will likely be key here.
Global High Yield Credit/Convertibles/Preferreds: We think that the high yield market is in reasonable shape for now. Given refinancing needs, we expect the new issue calendar to be lively over the next few weeks and months. As such, we expect to see some reasonable concessions that we will look to take advantage of. So, while we have taken some profit recently, we expect to add back soon. By sourcing from cash and selling down loans, we expect to selectively increase exposure to the asset class through what is expected to be attractive new issue premium.
Bank Loans: Bank loans delivered outstanding performance in 2023 and demand remained strong at year end. Carry remains attractive but a large proportion of outstanding loans are priced at 99, limiting further upside as refinancing takes place. Fundamentals are not great and the floating-rate nature of the asset class does not benefit from any potential rate cuts. We expect to lighten our loan exposure over the coming weeks and months. The extent to which we trim depends on the extent to which we believe that the economy is facing a soft landing. If the economy holds up, loan carry will be attractive, but in general, we are biased to reduce.
Securitized: Some securitized areas appear cheap on an efficient frontier basis, but we remain cautious as some defaults (e.g., lower quality credit cards) are starting to pick up. Jobs data is key as default rates will likely remain manageable if unemployment stays below 5%. In addition, office real estate remains vulnerable. Again, we remain cautious as we think many areas of the securitized markets ran too far too fast recently. However, we will focus on specific short-duration roll-down opportunities where available.
Duration and Yield Curve: Interest rate volatility, as measured by the Merrill Lynch Volatility Estimate Index (MOVE index), has been elevated throughout 2023, indicating uncertainty about the direction of interest rates — there have been many “false dawns” with markets pricing in cuts only to then price them out again. While it is now clear that inflation has peaked and base effects will see further falls in core Personal Consumption Expenditures (PCE), the path back to target remains opaque. The markets have now pulled forward five full cuts in 2024, with the first starting in March. We closed out our overweight at year end and are now at benchmark for duration. We expect a small pullback in Treasury yields after the latest bout of exuberance, and are now watching for signs of slowing economic activity as a potential catalyst to add duration back. We are also mindful of a deluge of expected Treasury issuance (and US deficit/shutdown concerns), potentially putting upward pressure on government bond yields.