RATES MAY BRING STORM CLOUDS IN JUNE
Fixed income posted one of their strongest months of the year in May, as the 17 basis point decline in 10-year yields drove positive total returns for most of the U.S. and world’s bond markets. As the table below indicates, the aggregate index posted a 1.1% gain, which brought YTD totals to almost 4%. On the heels of the strong downward movement in yields, Treasuries tagged on an additional 0.9% to returns, with the broad govie index returning 2.9% YTD, though the rally in duration drove 12+% returns in the long end. Other sector gains indicated an increasing reach for yield, with EM sectors posting monthly gains of between 2% and 3%, bringing YTD results to +5.6% for EM corporate and +8% for EM sovereigns. The preferred and taxable municipal sectors have been the strongest groups on a YTD basis given their higher duration profile, reporting 10+% gains broadly on a YTD basis. Risk adjusted returns favored IG corporates and municipals, which posted 1.4% and 2.5% gains in May, respectively pushing YTD levels to 5.6% and 5.9%. Negative returns for MBS and weak returns for high yield put them as the laggards for the month, with May gains of -0.5% and 0.9%. These results are consistent with the measured reach of risk that we have seen since early this year. High yield in particular has defied critics that have called the asset class one of the biggest bubbles in the market. We will point out that HY has since outperformed in June, possibly indicating a push towards greater risk recently.