OBND returned 0.33% during the second quarter.
After Jerome Powell’s testimony and the mitigation of the banking crisis in the first quarter, the market generally accepted that the Federal Reserve (Fed) was still very much going to tame inflation but not allow the faith in the banking system to be tarnished. The result was a stronger push into riskier assets and the fund did not keep up with the market. Bank loans and high yield had the strongest performance over the quarter and while risk was added over the period, we remained underweight. Our duration profile favored a steepener to take advantage of the inverted yield curve and its higher carry and to reduce credit spread duration/sensitivity. The front end of the yield curve continued to sell off which led to underperformance on the rate side and at the same time credit spreads have performed well. Overall, the fund was positioned too conservatively, we believe that our overall exposure is reasonable in light of very tight valuations and continued Fed hawkishness.
Sept 27 2021
|Bloomberg U.S. Aggregate Bond Index||-0.84%||2.09%||-0.94%||-3.96%||0.77%||1.52%||-6.67%|
|SPDR Loomis Sayles Opportunistic Bond Composite Index||0.98%||4.45%||5.68%||0.50%||2.90%||3.49%||-3.89%|
Source: State Street Global Advisors, as of June 30, 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. Curent 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 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 calculates. 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%
As inflation seems to have slowed, the labor force continued to show strength despite the presence of other recession indicators. With equity and credit markets having generally been resilient throughout tighter monetary policy (i.e. relatively tight valuations) and given the recent banking stress in March 2023, we are cautious of potential valuation correction.
With the expectation that the rate hiking cycle is nearing an end, we expect there to be a point where duration will once again be in favor. As investors become cautious on bank loans and any sign of a recession, we are in favor or adding duration when that time comes through long-duration investment-grade issues. However, we acknowledge that these conditions may take some time to materialize. With respect to high yield, we remain underweight with a bias for the high quality segment of the sector and will look to other asset classes for sources of high-quality carry.
Global Investment-Grade Credit: From a macro standpoint, we are increasingly constructive on investment grade as we edge closer to recession and seek to move up in quality (and improve liquidity). We do not love spreads at current levels but then the same can be said for most other credit asset classes. Compared to previous quarters, where we were biased to add at the margin, we are not targeting to increase exposure by roughly 5%. There are no large sector biases but we continue to like large balance sheet banks and are minimizing exposure to real estate related names.
Global High Yield Credit/Convertibles/Preferreds: The resiliency of the US economy and, in turn, the high yield market has surprised us yet we continue to believe that current valuations do not provide adequate compensation for the risks. As we enter the traditionally quiet months of summer, there is an argument to suggest that this grind higher can continue, leading to potential relative underperformance. However, in our experience, chasing risk at this point in the cycle can end in tears. Remain underweight high yield with limited exposure to the most risky parts of the market. Look to other asset classes for sources of high-quality carry.
Bank Loans: The US economy is stronger than many anticipated, including us. We see many weak economic signals but employment remains very strong. Against such a backdrop, loans can continue to put up respectable numbers. However, any signs that we are entering recession will likely see investors flee the asset class. Recent defaults, while small in number, have shown poor recovery values. We remain cautious from a credit quality standpoint. We expect to remain modestly below benchmark weight in our loan exposure with a bias towards the higher quality areas of the market.
Securitized: We have viewed securitized as vulnerable for some time as monetary policy tends to hit consumers 8 to 24 months after the first rate hike, which was in May 2022. The strength of the US economy appears to have insulated the consumer somewhat but we remain cautious, especially with the Fed still operating directly in the market. We expect to maintain our single digit exposure to securitized but to risk reward profiles for selective opportunities given more attractive valuation levels. Continue to favor high-quality collateralized loan obligation (CLO) debt as well.
Duration and Yield Curve: Inflation appears to have peaked globally (perhaps with the exception of the UK) yet the path back down to what could be considered more ‘normal’ levels is fast becoming long and arduous. While many of our recession indicators (e.g. bankruptcy filings) continue to flash red, the strength of the US labor force continues to confound expectations given the extent of monetary policy tightening that has been meted out. Equity and credit markets have, for the most part, taken all this in stride and we believe that a valuation correction (i.e. drawdown) is due. Timing, however, is everything, and remains uncertain. There will come a point where duration will be in favor and we will want to sell bank loans in favor of long duration investment grade. However, we are not there yet and we may see more of the same over the coming months. We remain poised to take advantage of opportunities as they arise and continue to look for what might ‘break’ the US economy.
A debt financing obligation issued to a company by a bank or similar financial institution and then repackaged and sold to investors.
Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.
Collatralized Loan Obligations (CLO)
Securities that are backed by a pool of debt, typically business loans, that are grouped by credit quality into tranches.
Commercial Mortgage-Backed Securities (CMBS)
Fixed Income investment products that are backed by mortgages on commercial properties rather than residental real estate
Consumer Price Index (CPI)
A widely used measure of inflation at the consumer level that helps evaluate changes in cost of living. The CPI is composed of a basket of consumer goods and services across the economy and is calculated by the US Department of Labor by assessing price changes in the basket of goods and services and averaging them. Core CPI is the same series, but excluding food and energy prices, which are considered to be volatile enough to distort the meaning and usefulness of so-called headline CPI. The absence of food and energy, means the core series reflects long-term inflation trends more accurately.
Mortgage-Backed Securities (MBS)
Pooled securities that are backed by mortgage loans. Agency mortgage-backed securities refer to securities backed by pools of mortgage issued by US government-sponsored enterprises, such as Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Non Agency Residental Mortgage-Backed Securities (NARMBS)
Pooled securities that are backed by private institutions such as trusts and special purpose vehicles. Non-agency residental mortgage-backed securities are not guararnteed by the U.S. government or GSEs and generally consists of mortgages that do not meet the agencies’ underwriting requirements.
Important Risk Information
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Investing in high yield fixed income securities, otherwise known as "junk bonds", is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy. Other risks associated with convertible bond investments include: Call risk which is the risk that bond issuers may repay securities with higher coupon or interest rates before the security's maturity date; liquidity risk which is the risk that certain types of investments may not be possible to sell the investment at any particular time or at an acceptable price; and investments in derivatives, which can be more sensitive to sudden fluctuations in interest rates or market prices, potential liquidity of the markets, as well as potential loss of principal.
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