HOLD: 2nd Quarter 2022 Portfolio Review
The Advisor Shares North Square McKee Core Reserves ETF returned -0.20% in the second quarter and -0.98% for the year-to-date. The Bloomberg U.S. Treasury Bills 1-3-months Total Return Index returned 0.12% for the quarter and 0.15% year-to-date.
Bond market volatility remained at levels last seen during the height of COVID as the Fed ramped up its rhetoric with respect to fighting inflation. Increases in the Fed Funds Rate accelerated from the initial 25 basis point bump in March, rising 50 basis points in May and an additional ¾ point in June. The outlook for the yearend 2022 Funds rate stands at 3.45%, versus 0.82% on January 1st, having briefly topped 3.9% just a few weeks ago.
An abrupt reversal lower in market interest rates occurred in late June as investors’ focus on inflation concerns were quickly supplanted by growing recession fears. The most recent reports on consumer and business sentiment and retail sales suggested inflation, rising interest rates and lower stock prices were a drag on spending in real terms. These signs of economic weakness exposed outsized bets on further declines in bond prices, fueling a short-covering bounce into quarter end. Ultimately, the tenor of the recent bounce in bond prices is highly dependent on upcoming readings on “sticky” components of inflation and longer-term concerns over de-globalization.
The specter of inflation, slowing growth and elevated volatility impacted every spread sector in Q2, pressuring yield spreads higher and leading to underperformance versus Treasuries. The impact was particularly evident in corporates and asset-backed securities, where yield spreads widened in the quarter’s market selloff due to credit concerns and bouts of market illiquidity, even in high-quality holdings. As expected, market liquidity improved as we moved into the third quarter.
On a positive note, we saw a return to more negative correlation between stocks and bonds as we approached the end of the quarter. The signs of an economic slowdown have also shortened the expected tenure of the Fed’s restrictive policy moves, with the forecast peak in the Funds rate now occurring in March of next year. Portfolio duration, which has targeted the 6-month to 8-month range in the first half, will likely be extended as we see confirmation of a peak in inflation in the coming months.
|Security Description||Price $||Portfolio Weight %|
|US TREASURY N/B 0.125 10/31/2022||99.34||5.66%|
|US TREASURY N/B 1.5 8/15/2022||100.01||4.27%|
|WELLS FARGO & COMPANY 3.45 2/13/2023||100.13||3.18%|
|FHR 4614 PA 3 12/15/2043||99.47||3.11%|
|CRED SUIS GP FUN LTD 3.8 9/15/2022||100.09||2.99%|
|BANK OF AMERICA CORP 3.004 12/20/2023||99.72||2.84%|
|MORGAN STANLEY 4.875 11/1/2022||100.72||2.64%|
|ATHENE GLOBAL FUNDING FRN 1/7/2025||96.91||2.28%|
|EDISON INTERNATIONAL 2.4 9/15/2022||99.80||2.09%|
|OSCAR 2022-1A A2 1.6 3/10/2025||98.30||1.93%|
As of 06.30.2022. Cash is excluded.