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SPDR® SSGA Ultra Short Term Bond ETF (ULST) – Q4 2023 Commentary

During the fourth quarter of 2023, ULST outperformed the Bloomberg US Treasury Bellwether 3 Month Index on both a NAV and market price basis.

Performance Commentary

During the fourth quarter, ULST outperformed its benchmark, due to its overweight allocation to duration and investment-grade corporate credit. During the quarter, the Fed held the Fed Funds rate steady and communicated an increase in rate cut expectations in 2024, as presented in their December Summary of Economic Projections (SEP) Fed Funds rate projections, in the context of a softening labor market and moderating inflation, and the US Treasury surprised markets with a more modest increase of longer-term bond auctions, all of which led to a significant decline in interest rates and, in general, tighter short-term investment-grade credit spreads. For example, the yield on the December 2024 Fed Funds futures contract (a proxy for very short-term interest rates) decreased by 89 basis points (bps) during the quarter, producing positive price returns, Bloomberg Floating Rate Note Index (FRN) spreads tightened by 2 bps during the quarter, producing positive price returns plus carry, the FRN credit curve steepened, with BBB FRN spreads 14 bps and 11 bps wider versus AAA and AA FRNs, respectively, producing negative price returns plus carry, and the Bloomberg 1-3 Year Credit Index (1-3 Year Credit) tightened 14 bps, producing positive price returns plus carry, versus the fund’s benchmark.1

Fund Performance

  As Of QTD (%) YTD (%) 1 Year (%) 3 Year (%) 5 Year (%) 10 Year (%) Since Inception
Oct 09 2013 (%)

NAV

Dec 31, 2023

2.00

5.67 5.67

2.22

2.28

1.66

1.64

Market Value

Dec 31, 2023

1.95

5.61

5.61

2.22

2.27

1.65

1.64

Bloomberg US Treasury Bellwether 3 Month Index

Dec 31, 2023

1.39

5.15

5.15

2.21

1.92

1.28

1.25

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. Performance of an index is not illustrative of any particular investment.  All results are historical and assume the reinvestment of dividends and capital gains. It is not possible to invest directly in an index.Performance returns for periods of less than one year are not annualized. Performance is shown net of fees. Visit www.ssga.com for most recent month-end  performance. 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.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 return may differ.

 

Gross Expense Ratio: 0.20% Net Expense Ratio: 0.20%

 

The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.

Quarter in Review Commentary

During the quarter, the US economy generated softer job growth and moderating inflation. In reaction, the Fed left the Fed Funds rate unchanged during the quarter and communicated an increase in Fed Funds rate cut expectations for 2024. In addition, the US Treasury surprised markets with a more modest increase of longer dated auctions announced in November. As mentioned above, all of this led to a significant decrease in short-term interest rates during the quarter and tighter credit spreads. For example, during the quarter, the yield on the above-mentioned December 2024 Fed Funds futures contract decreased by 89 bps, the above-mentioned FRN Index spread tightened 2 bps, the above-mentioned 1-3 Year Credit Index spread tightened 14 bps, the Bloomberg US Credit Index spread tightened by 19 bps, and the Bloomberg US High Yield Index spread tightened by 71 bps.2 In terms of Fed monetary policy, the Fed Funds rate remained at a range of 5.25%–5.50% and the Fed’s balance sheet decreased by roughly $290 billion during the quarter, as the Fed’s “Plans for Reducing the Size of the Federal Reserve’s Balance Sheet,” announced May 4, 2022, remained in full effect for the quarter. The following chart shows that the market believes that the Fed Funds rate at the end of 2024 will be in a range of 3.75%–4.00%, suggesting six 25 bps rate cuts from the current range.

Fed Funds Expectations Versus Nominal Fed Funds Rate

Portfolio Positioning and Outlook Commentary

Our fundamental active fixed income investment process has three components: structural, cyclical, and tactical. Our analysis of structural economic growth trends, which includes demographic trends, the trend growth rate of the labor force, and the trend growth rate of productivity, suggests to us a US trend real growth rate of roughly 2.0%. As a result, our structural analysis suggests that interest rates will remain historically low. One of the questions that’s being asked is whether inflation will be structurally higher due to recent global geopolitical disharmony, which would structurally increase nominal interest rates. Our view is that trend inflation data has risen from a low of 1.50%, observed during 2017–2020, to roughly 2.50%, suggesting a moderate increase in structural nominal rates, which remains historically low long term. Importantly, we’ll continue to monitor deglobalization trends in the coming quarters.

Our analysis of cyclical trends focuses on economic activity momentum as well as policies that can serve to either extend or contract the economic cycle. Economic activity momentum, as reflected in the Institute of Supply Management (ISM) Manufacturing and Services PMI surveys of business conditions, suggests that US growth momentum has moderated year-over-year. As mentioned above, the labor market is softening and inflation is moderating. Based upon the softening of employment and inflation over the quarter, the Fed paused on further Fed Funds rates hikes and has established a restrictive monetary policy posture that is designed to contract the economic cycle. 2024 is an election year, and as a result, little is expected in the form of fiscal stimulus; in fact, there is some risk that fiscal stimulus could become a drag on growth and serve to contract the economic cycle. High mortgage and auto loan rates continue to have a negative impact on activity in the consumer space and the expectation is that there’ll be a continued slow demand for these large expenditure goods. Given our concerns about the lagged effect of restrictive policies, our expectations for private sector investment is modest at best.

Given that monetary policy is in restrictive territory( i.e. late cycle monetary policy), the fund is positioned above its strategic duration risk target of 0.50. The fund’s duration exposure closed the quarter at 0.80 years, unchanged quarter-over-quarter. Regarding our asset allocation strategy, we’re maintaining a conservative asset allocation exposure, with a higher than strategic target allocation to government securities and cash, and a lower than strategic target allocation to spread product. Our credit allocation to BBB-rated credit is at 29.2%, which is just above our long-term strategic exposure of 25.0% for this strategy, but, importantly, the Fund’s BBB spread duration is at 0.21 years, which is below the fund’s strategic exposure for this strategy (0.25 years), according to that metric. In other words, we’re maintaining a very short maturity profile for the fund’s BBB exposure. The strategy has no allocation to BB-rated credit (which is an allocation used primarily for the optimal management of fallen angels). Asset allocation shifts during the quarter were limited to a moderately lower exposure to cash and government securities and a moderately higher exposure to industrials, financials, and ABS. The Fed’s achievement of restrictive monetary policy and classic signals of recession, such as the curve inversion of 3-month Treasury bills and the 10-year Treasury note, are likely to serve as headwinds to the economy and financial conditions in 2024. Given this outlook, we expect to remain above our strategic risk target for duration and government securities, and below our strategic risk target for credit risk in the near term, which should leave the fund with ample liquidity for opportunities into 2024.

ASSET ALLOCATION

Security Description

Market Value (%)

Index (%)

Industrials 31.8

100.0

 

 

 

 

 

Financial Institutions 30.9
Treasurys 13.1
Asset-Backed Securities (ABS) 8.7
Short-Term Investment Funds (STIF)
6.7
Utililties 4.9
Commerical Mortgage-Backed Securities (CMBS) 4.0
Futures 0.0
Other 0.0
Total

100.0

100.0%

CREDIT ALLOCATION

Credit Rating

Market Value (%)

Index (%)

AAA Rated or above

25.0

100.0

 

 

 

 

 

AA Rated

10.1

A Rated

35.2

BBB Rated

29.2

BB Rated

0.0

Not Rated

0.9

Total

100.0

100.0

Source: State Street Global Advisors, as of December 31, 2023. Asset allocation is a method of diversification that positions assets among major investment categories. Asset allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.

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